Understanding Section 194N: TDS on Cash Withdrawals

Section 194N of the Income Tax Act introduces TDS on cash withdrawals to curb the flow of unaccounted money. This section affects individuals and businesses making significant cash transactions. Read on to know more.
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3 min
12-December-2024

In recent years, the Indian government has implemented several measures to curb the flow of unaccounted money and promote digital transactions. One such measure is Section 194N of the Income Tax Act, introduced to regulate large cash withdrawals and ensure tax compliance. This article provides an in-depth understanding of Section 194N, its implications, and how it integrates.

What is Section 194N?

Section 194N of the Income Tax Act mandates the deduction of Tax Deducted at Source (TDS) on cash withdrawals exceeding a specified threshold within a financial year. This provision was introduced as part of the Finance Act, 2019, and aims to discourage cash transactions in favour of digital payments, thereby reducing the circulation of black money.

Section 194N of the Income Tax Act was introduced to discourage large cash transactions and promote digital payments. This section applies to withdrawals from banks, cooperative banks, or post offices. Some of the key features of the section:

TDS threshold:

  • For individuals who have filed Income Tax Returns (ITR) in the last three financial years, TDS applies on cash withdrawals exceeding Rs. 1 crore.
  • For non-ITR filers, the threshold is reduced to Rs. 20 lakh.

TDS rate:

  • 2% for withdrawals over Rs. 1 crore.
  • 2% for withdrawals between Rs. 20 lakh and Rs. 1 crore for non-filers.
  • 5% for withdrawals exceeding Rs. 1 crore for non-filers.

Why was Section 194N introduced?

Section 194N was introduced in the Union Budget of 2019. The introduction of Section 194N aligns with the government's broader objectives of promoting a digital economy and enhancing tax compliance. By imposing TDS on large cash withdrawals, the government seeks to discourage individuals and businesses from relying heavily on cash transactions, which are often difficult to trace and can lead to tax evasion. This measure also complements other initiatives like demonetisation and the push for digital payments.

Read more: Deductions under Section 80D

What are the objectives of Section 194N – Income Tax Act?

The key objectives of 194N of Income Tax Act include:

  • Discouraging excessive cash usage to encourage digital transactions.
  • Tracking high-value cash withdrawals for better accountability.
  • Minimising black money circulation by ensuring traceability of transactions.

This provision fosters financial transparency and improves tax compliance across entities and individuals.

What is the purpose of TDS in Section 194N?

The purpose of TDS under 194N of Income Tax Act is to regulate high-value cash withdrawals, reduce dependence on cash transactions, and promote digital payments. This provision helps track large cash movements and discourages unaccounted money. By taxing significant withdrawals, it aims to curb tax evasion and improve compliance with the income tax framework.

What is the applicability of Section 194N?

194N of Income Tax Act applies to cash withdrawals exceeding Rs. 1 crore annually for individuals filing ITR in the past three years. For non-ITR filers, the threshold is Rs. 20 lakh.

It applies to withdrawals from banks, cooperative banks, or post offices. Exceptions include government bodies, banking companies, cooperative societies, and certain exempted entities.

Who is liable to deduct TDS under Section 194N?

As per the provisions of section 194N of the Income Tax Act, the person withdrawing cash and making payment to another entity is liable to deduct TDS and deposit it with the government. Here are the eligible entities:

  • Any private or public sector bank
  • Post offices
  • Co-operative banks

The provisions of section 194N do not apply to:

  • Any government bodies
  • Any registered bank, including co-operative banks
  • Any white label ATM operator operating in India of any bank, including co-operative banks
  • Commission agent or trader of Agriculture Produce Market Committee (APMC) withdrawing cash to make payments to farmers.
  • Any other person notified by the Indian government under any other act, section, or notification.

What are the threshold limits for TDS deduction under Section 194N?

The threshold limits for TDS deduction under Section 194N vary based on the tax compliance of the account holder.

1. For individuals or entities

If an individual or entity has filed income tax returns for the previous three assessment years, TDS is applicable on cash withdrawals exceeding Rs. 1 crore in a financial year. The TDS rate in such cases is 2% of the withdrawal amount exceeding Rs. 1 crore.

2. For non-filers of income tax returns:

If an individual or entity has not filed income tax returns for any of the previous three assessment years, TDS is applicable on cash withdrawals exceeding Rs. 20 lakh in a financial year. In this case, TDS is deducted at a rate of 2% on withdrawals exceeding Rs. 20 lakh and 5% on withdrawals exceeding Rs. 1 crore.

These thresholds are designed to ensure that individuals and entities with significant cash transactions contribute to the tax system.

Also, read: Section 115BAC of Income Tax Act

Are there any exemptions or exclusions under Section 194N?

While Section 194N broadly applies to all cash withdrawals above the specified limits, there are certain exemptions and exclusions:

  • Government bodies: Withdrawals made by the Central or State Government or any other government body are exempt from TDS under Section 194N.
  • Banks and co-operative banks: Withdrawals made by banks, cooperative societies engaged in banking, or post offices from their accounts are also exempt.
  • Other specific entities: Withdrawals by business correspondents of banks and cooperative banks, as well as those made by the primary agricultural credit societies or cooperative societies, are excluded from TDS.

These exemptions are designed to ensure that essential cash transactions for government and banking operations are not hindered.

Read more: Section 194A of Income Tax Act

How to calculate TDS on cash withdrawals as per Section 194N?

Calculating TDS under Section 194N involves identifying the total cash withdrawal amount and applying the relevant TDS rate based on the individual's or entity's tax compliance history.

Step 1: Determine the total cash withdrawn:

Add up all cash withdrawals made from a single account during the financial year.

Step 2: Check compliance history:

Determine if the account holder has filed income tax returns for the previous three assessment years.

Step 3: Apply the relevant threshold:

Based on the compliance history, apply the appropriate threshold limit (Rs. 1 crore or Rs. 20 lakh).

Step 4: Calculate TDS:

If the total withdrawals exceed the threshold, apply the relevant TDS rate (2% or 5%) on the excess amount.

For example, if an individual who has filed income tax returns for the last three years withdraws Rs. 1.2 crore in a financial year, TDS would be 2% on Rs. 20 lakh (the amount exceeding Rs. 1 crore).

What are the compliance requirements under section 194N?

Under 194N of Income Tax Act, deductors like banks and post offices must:

  • Monitor withdrawal thresholds for TDS applicability.
  • Deduct TDS at the applicable rates.
  • File TDS returns (Form 26Q) regularly.

Withdrawers should file ITR to avail higher thresholds and maintain updated records of cash transactions.

Cash withdrawal amount

TDS rate (if ITR is filed for any or all three previous AYs)

TDS rate (if ITR is not filed for the last three years)

Up to Rs. 20 lakh

Nil

Nil

Above Rs. 20 lakh and below Rs. 1 Crore

Nil

2%

Above Rs. 1 Crore

2%

5%

What are the consequences of non-compliance with Section 194N?

Non-compliance with Section 194N can lead to significant consequences, both for the account holder and the financial institution:

1. Penalties for financial institutions:

If a bank or post office fails to deduct TDS as required under Section 194N, it may be liable to pay the amount it failed to deduct, along with interest and penalties.

2. Penalties for account holders:

If an account holder attempts to avoid TDS by withdrawing cash from multiple accounts or using other methods, they may face scrutiny from the Income Tax Department, which could lead to penalties and legal action.

3. Impact on credit and financial health:

Non-compliance with TDS provisions can also negatively impact an individual's or entity's creditworthiness, making it difficult to obtain loans or other financial services in the future.

What is the rate of TDS u/s 194N?

Under sec 194N of Income Tax Act, TDS is levied as follows:

  • 2% for withdrawals exceeding Rs. 1 crore.
  • 2% for withdrawals between Rs. 20 lakh and Rs. 1 crore for non-ITR filers.
  • 5% for withdrawals above Rs. 1 crore for non-ITR filers.

What are the points of TDS under Section 194N?

Under sec 194N of Income Tax Act, TDS is deducted when cash withdrawals cross prescribed limits. It applies to both ITR and non-ITR filers but with different thresholds and rates. Certain entities, like government bodies, are exempt.

Discouraging high-value cash transactions

The provision under 194N of Income Tax Act reduces the dependency on cash by taxing large withdrawals. This helps in encouraging digital payments and minimising the reliance on physical currency for high-value transactions.

Curbing black money

Section 194N aims to restrict black money by making cash transactions traceable. By taxing withdrawals above specific limits, it ensures better accountability of financial activities and discourages unreported income circulation.

Promoting effective tax filing

The threshold for TDS under 194N of Income Tax Act favours regular ITR filers. Non-filers face stricter limits and higher rates, encouraging individuals and businesses to comply with tax filing norms to enjoy reduced liabilities.

Improved financial transparency

With TDS implementation under 194N of Income Tax Act, financial institutions can monitor cash withdrawals, promoting transparency. This assists authorities in maintaining records of high-value transactions, reducing the scope for misuse of funds.

What are the implications of section 194N?

1. Impact on individuals

194N of Income Tax Act impacts individuals by encouraging digital payments and reducing cash-based transactions. Non-compliance leads to higher TDS rates, directly affecting liquidity.

2. Tax planning considerations

Individuals and businesses must plan finances effectively, considering the TDS threshold under 194N of Income Tax Act. Filing regular ITRs helps avail better withdrawal limits and avoid higher deductions.

What are latest changes in Section 194N?

Under the latest updates to sec 194N of Income Tax Act:

  • Threshold changes: Non-filers face a reduced limit of Rs. 20 lakh for TDS applicability.
  • Higher rates: 5% TDS applies for withdrawals over Rs. 1 crore for non-filers.
  • Promoting compliance: ITR filing ensures higher withdrawal thresholds and lower TDS rates.

Is TDS under Section 194N refundable?

Yes, TDS deducted under 194N of Income Tax Act is refundable. You can claim it while filing your income tax return (ITR) if your total tax liability is less than the TDS deducted.

Conclusion

Section 194N is a critical tool in the government's efforts to promote digital transactions and curb black money. By understanding its provisions, individuals and businesses can better manage their cash transactions and ensure compliance with tax laws. Integrating health insurance into financial planning is also a wise strategy, as it provides a safety net against unforeseen medical expenses, reducing the need for large cash withdrawals and the associated tax implications.

Read more: Tax benefits on health insurance

Frequently asked questions

What is the purpose of Section 194N?
The purpose of Section 194N is to discourage excessive cash transactions by imposing TDS on large cash withdrawals. This measure aims to promote digital transactions, increase tax compliance, and reduce the circulation of unaccounted money in the economy.

Does Section 194N apply to both individuals and businesses?
Yes, Section 194N applies to both individuals and businesses. It mandates TDS on cash withdrawals exceeding specified thresholds, regardless of whether the account holder is an individual or an entity, thereby ensuring broader tax compliance.

How is TDS under Section 194N calculated?
TDS under Section 194N is calculated based on the total cash withdrawals within a financial year. If withdrawals exceed the specified threshold, TDS is deducted at a rate of 2% or 5% on the amount above the threshold, depending on the account holder's tax filing history.

Can exemptions be claimed under Section 194N?
Yes, certain exemptions can be claimed under Section 194N. These include withdrawals made by government bodies, banks, cooperative societies, and other specific entities, ensuring that essential cash transactions are not subject to TDS.

What is TDS 194N on cash withdrawal?

TDS under 194N of Income Tax Act applies to cash withdrawals exceeding specified limits. It is deducted at 2%-5%, depending on ITR filing history, to discourage high-value cash transactions and promote digital payments.

How do I claim my 194N TDS refund?

To claim a refund for 194N TDS, file your Income Tax Return (ITR). The refund is processed if your total tax liability is lower than the TDS deducted during the financial year.

What is the difference between 194N and 194NF TDS?

194N applies to cash withdrawals exceeding thresholds, while 194NF relates to TDS on income payments under certain conditions. Both target different financial activities and serve distinct regulatory purposes.

What is the latest notification of 194N?

The latest update to 194N of Income Tax Act reduces the threshold to Rs. 20 lakh for non-ITR filers, with a TDS rate of 5% for withdrawals exceeding Rs. 1 crore, ensuring stricter compliance.

How to file ITR for 194N TDS?

To file ITR for 194N TDS, log in to the Income Tax portal, declare your income, and include TDS details. Verify using Form 26AS and submit the return to claim a refund or settle liability.

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