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To discourage cash payments, the finance minister has introduced Section 194N in Union Budget 2019 for tax deduction at source (TDS) on cash withdrawals exceeding Rs 1 crore.
In Budget 2020 the threshold limit for TDS under Section 194N is reduced to Rs 20 lakh for taxpayers who have not filed their income tax returns for past three years.
TDS shall be deducted at prescribed rates if cash is withdrawn in excess of Rs 20 lakh during the financial year by the taxpayer.
Let’s discuss Section 194N in detail:
Section 194N is applicable on more than Rs 1 crore cash withdrawals
from the bank account during a financial year. It will apply to the withdrawal of all the sums of money or an aggregate of sums from a particular bank in a financial year. The section will apply to withdrawals made by any taxpayer, including:
But it shall not apply if payment is made to-
The payer shall deduct tax while making payment to any individual in cash from the individual’s bank account on the amount over Rs 1 crore.
The limit of Rs 1 crore in a financial year is with respect to per bank or post office account and not per the taxpayer’s account.
For example, if a person has three bank accounts with three different banks, he can withdraw cash of Rs 1 crore * 3 banks, i.e. Rs 3 crore without any TDS.
The cash withdrawal made by any taxpayer from the bank accounts maintained by such taxpayer (recipient) will only attract TDS under Section 194N.
For instance, if a bank makes a cash payment of more than Rs 1 crore in a FY to its account holder (i.e. any taxpayer) from the account maintained by such taxpayer, then the bank will have to deduct TDS.
In case the taxpayer issues a bearer cheque to a third party, over Rs 1 crore in a financial year, the recipient of the cash is not the account holder but a third party. In such a case, the payment is not made by the bank to the account holder. In the above situation, there is an ambiguity that whether such bearer cheque given to any person (like vendor) to collect payment from the bank will be covered under section 194N? Whether the bank is liable to deduct tax on the account holder’s funds in respect of the bearer cheque issued to a third party?
Separately, in the case of business payments, payment made through a bearer cheque would not be allowed as an expenditure under section 40(A)(3) of the Income Tax Act. Any payment exceeding Rs 10,000 per day (in a single transaction or in aggregate) is not allowed as business expenditure.
The provision of Section 194N will be applied to the payments made on or after 1 September 2019. But the limit of Rs 1 crore will apply to the cash payments/withdrawals made during FY 2019-20.
To discourage cash transactions in the country and promote the digital economy, ‘Section 194N – TDS on cash withdrawals over and above Rs 1 crore’ has been introduced through the Finance Bill, 2019.
The person (payer) making the cash payment will have to deduct TDS under Section 194N. Here is the list of such persons:
There are certain categories of persons (payee) to whom the provision of this section will not apply. They are listed below:
The payer should deduct TDS while making the cash payment over and above Rs 1 crore in a financial year to the payee. If the payee withdraws a sum of money at regular intervals, the payer will have to deduct TDS from the amount once the total sum withdrawn exceeds Rs 1 crore in a financial year.
Further, the tax will be deducted on the amount exceeding Rs 1 crore.
For example, if a person withdraws Rs 99 lakh in aggregate in the financial year and next time, an amount of Rs 1,50,000 is withdrawn, the TDS liability is only on the excess amount of Rs 50,000.
The payer will have to deduct TDS at the rate of 2% on the cash payments/withdrawals of more than Rs 1 crore in a financial year under Section 194N.
Thus, in the above example, TDS would be on Rs 50,000 at 2%, i.e. Rs 1,000.
If the individual receiving the money has not filed an income tax return for three years immediately preceding the year, the tax deduction limit is reduced to Rs 20 lakh.
The TDS will be deducted at:
-2% on the cash payments/withdrawals of more than Rs 20 lakh and up to Rs 1 crore
-5% for withdrawal exceeding Rs 1 crore
Mr Raj has made the following withdrawals during the financial year 2020-21. He has not filed his ITR for the financial year-2017-18, 2018- 19, 2019-20 and that the due date for filing of return for these years has expired.
|Date||Amount of Withdrawal (Rs)||Aggregate amount withdrawn up to the given date (Rs)||Rate||Computation||Tax to be deducted (Rs)|
|01/04/2020||14 lakh||14 lakh||–||–||–|
|21/07/2020||26 lakh||40 lakh||2%||(40 lakh -20 lakhs) x 2%||40,000|
|25/08/2020||35 lakh||75 lakh||2%||35 lakh x 2%||70,000|
|04/09/2020||35 lakh||1.10 crore||2% and 5%||(25 lakh x 2%) + (10 lakh x 5%)||1,00,000|
|18/10/2020||50 lakh||1.6 crore||5%||50 lakh x 5%||2,50,000|
Mr Raj maintains a savings and current account with XYZ bank. His transactions during the FY 2020-21 are as follows:
|Date of cash withdrawn||Withdrawal from the saving account (in Rs)||Withdrawal from the current account (in Rs)|
|Tax to be deducted||Rs 20,000
Mr Raj has withdrawn cash from the following banks during the financial year–
|Bank||Total cash withdrawn during the FY 2020-21 (in Rs)|
|Axis Bank||₹60 lakh|
|SBI Bank||₹50 lakh|
|ICICI Bank||₹10 lakh|
In the above example, No bank is required to deduct TDS under Section 194N as the limit of Rs 1 crore is not exhausted in any of the banks.
However, if Mr Raj withdraws cash of more than Rs 1 crore from SBI bank, then SBI bank is liable to deduct TDS at 2% or 5%, as the case may be.
Yes, you can claim the tax deducted at source (TDS) on cash withdrawal from the total tax payable while filing your income tax return.
Section 194N applies to cash withdrawals made by residents and non-residents.
Section 194N is applicable to all persons including charitable institutions, AOPs, Clubs, Trusts, etc., except few exceptions that are clearly defined in the said provision.