Under Section 194N of the Income Tax Act, Tax Deducted at Source (TDS) is applicable when the total amount of cash withdrawn by an individual in a financial year exceeds certain thresholds. If the person has not filed income tax returns (ITRs) for the last three assessment years (AYs), TDS is deducted when the total cash withdrawals exceed Rs. 20 lakh. However, if the person has filed ITRs for at least one of the previous three AYs, the threshold for TDS deduction increases to Rs. 1 crore.
This article will help you understand everything about section 194N of the Income Tax Act and how you can utilise its provisions to ensure better tax compliance.
What is Section 194N of Income Tax?
Section 194N of the Income Tax Act deals with Tax Deducted at Source (TDS) deduction on the amount withdrawn as cash physically by individuals and other eligible entities. As per section 194N of the Income Tax Act, every individual or eligible entity must deduct 2% TDS if the sum or aggregate sum of cash withdrawn in a financial year exceeds:
- Rs. 20 lakh if the individual or entity has not filed an Income Tax Return (ITR) for all of the last three assessment years.
- Rs. 1 Crore if the individual or entity has filed an Income Tax Return (ITR) for all or any of the last three assessment years.
Generally, as most individuals and entities file their ITRs regularly, the limit of Rs. 1 Crore is commonly applicable. In most cases, entities withdraw cash to make payments to other entities. If the cash withdrawal is above Rs. 1 Crore (Rs. 20 lakh if no ITR is filed in the last three AYs), the payer is liable to deduct TDS from the cash withdrawal amount and deposit it with the government before the due date.
The section is applicable to the following entities making withdrawals:
- An individual
- A company
- A partnership firm or LLP
- A Body of Individuals (BOIs) or an Association of Person (AOP)
However, the provisions of section 194N will not apply if the payment is made to:
- The Indian government
- Any public or private sector bank
- A post-office
- A co-operative bank
- Business correspondents of a registered banking company
- White-label ATM operators of any Indian bank.
- Commission agents or specified traders operating under the Agriculture Produce Market Committee (APMC) as per Notification No. 70/2019-Income Tax Dated 20th September 2019.
- Full-Fledge Money Changer (FFMC) licensed by the RBI as per Notification No. 80/2019-Income Tax dated 15th October 2019.
- Any other eligible person or entity notified by the Indian government.
Also read: What is section 195
Why was section 194N introduced?
The Indian government introduced section 194N in the Income Tax Act in the Union Budget 2019. The main aim of introducing section 194N was to discourage cash withdrawals and transactions and promote digital transactions in India. Furthermore, by reducing large cash transactions, the government hoped to curb the circulation of black money and unaccounted funds in the economy. With the government’s push for a digital India, the introduction of this section encourages individuals and businesses to adopt digital modes of payment, thereby increasing financial inclusion.
Initially, the threshold limit for TDS deduction under section 194N of the Income Tax Act was Rs. 1 Crore in a financial year. However, the Finance Act 2020 amended this threshold, introducing different limits based on the income tax return filing status of the person withdrawing cash.
Objective of Section 194N – Income Tax Act
Section 194N of the Income Tax Act is designed to encourage the use of digital payment methods, reduce cash transactions, and curb the creation of black money, all while enhancing tax compliance. This provision requires the deduction of TDS on cash withdrawals that exceed specified limits, thus discouraging large cash withdrawals by individuals, Hindu Undivided Families (HUFs), or other entities.
The aim is to incentivise the adoption of digital payment systems, which offer greater transparency and traceability, making it easier to monitor and enforce tax compliance. By limiting cash withdrawals, the government seeks to reduce the chances of unreported and untaxed cash transactions, which are more likely to contribute to the generation of black money.
Ultimately, the goal of Section 194N is to foster a cashless economy, improve tax collection, and reduce tax evasion.
What is the aim of TDS in Section 194N?
Tax Deducted at Source (TDS) under Section 194N of the Income Tax Act is applicable to cash payments exceeding Rs. 1 crore made to a payee in a financial year. If multiple cash payments are made throughout the year, TDS will be deducted when the cumulative amount reaches Rs. 1 Crore. Additionally, TDS is levied on any amount exceeding Rs. 1 lakh in a single payment.
For instance, if a payee receives a total of Rs. 99 lakh in cash payments during the financial year and then receives an additional Rs. 1,50,000, TDS will only be applicable on the excess amount of Rs. 50,000.
Also read: What is section 80EEB
Applicability of Section 194N
Section 194N applies to any individual who withdraws cash from their bank account(s), where the total cash withdrawals exceed Rs. 1 crore in a financial year. This provision is applicable to all financial institutions, including commercial banks, cooperative banks, and post offices.
How to calculate the threshold limit?
The threshold for TDS under Section 194N is calculated on cash withdrawals exceeding Rs. 1 crore per financial year from an individual bank or post office account, not based on the taxpayer’s PAN.
For instance, if a person holds accounts with three different banks, they can withdraw up to Rs. 1 crore from each, totaling Rs. 3 crore across all accounts without TDS.
Cash withdrawals made by a taxpayer from their own bank account (savings, current, etc.) exceeding Rs. 1 crore in a financial year are subject to TDS under Section 194N. For example, if a bank issues cash above Rs. 1 crore in a financial year to an account holder, the bank must deduct TDS on the excess amount.
In cases where a taxpayer issues a bearer cheque exceeding Rs. 1 crore to a third party, ambiguity exists as the cash recipient is not the account holder but a third party. It is unclear if Section 194N applies to bearer cheques issued to third parties and whether the bank should deduct TDS from the account holder’s funds for such payments.
Additionally, for business-related transactions, payments through bearer cheques cannot be claimed as business expenses if they exceed Rs. 10,000 in a single day, under Section 40(A)(3) of the Income Tax Act.
The provisions of Section 194N apply to cash payments made on or after September 1, 2019, with the Rs. 1 crore limit applying to cash withdrawals made in FY 2019-20.
Also read about: What is direct tax code
Compliance requirements under Section 194N
Under Section 194N, the compliance obligations involve obtaining a Tax Deduction and Collection Account Number (TAN) and deducting TDS at the prescribed rate. The deducted TDS must be deposited with the government by the 7th of the following month. Additionally, the deductor must file TDS returns quarterly using Form 26QC. Failure to comply with these requirements may result in penalties and interest charges.
What is the rate of TDS u/s 194N?
As per the provisions of section 194N of the Income Tax Act, the payer making the payment after withdrawing cash above Rs. 1 Crore must deduct 2% TDS. However, if the payer withdrawing the cash has not filed ITR in the last 3 years, TDS must be deducted at 2% for withdrawal amounts above Rs. 20 lakh and below Rs. 1 Crore and 5% if the withdrawal amount is above Rs. 1 Crore.
| 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% |
Note: If an eligible entity has multiple bank accounts, the limit exceeds per bank account. For example, if you have 4 bank accounts, you can withdraw Rs. 1 Crore from each, i.e., Rs. 4 crores, without deducting any TDS under section 194N of the Income Tax Act.
Also read about: Difference Between Income Tax Act and Direct Tax Code
Who will 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
- A post office
- A co-operative bank
However, the provisions of section 194N do not apply to:
- Any government body
- 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 is the point of TDS under section 194N?
Payers withdrawing cash and making payments above Rs. 1 Crore in a financial year are liable to deduct TDS under section 194N of the Income Tax Act. However, there are some main points for the Indian government to introduce section 194N in the Union Budget 2019. These are:
Discouraging high-value cash transactions
The government imposed a TDS deduction requirement on large cash withdrawals and subsequent transactions to reduce the reliance on cash. Furthermore, the government wants to encourage businesses and individuals to adopt digital payment methods to increase financial inclusion and create a more accountable financial system.
Curbing black money
High-value cash withdrawals are often associated with tax evasion and unaccounted wealth. By levying TDS on such withdrawals, the government can better monitor and control the flow of money and ensure it is not used for illicit purposes. Furthermore, individuals and entities are more likely to maintain proper records and report their income accurately to avoid the additional tax burden.
Promoting effective tax filing
Under section 194N, the government has set threshold limits and TDS rates based on whether an individual has filed income tax returns for the last three assessment years. Individuals who regularly file their tax returns benefit from a higher threshold (Rs. 1 Crore) before TDS is applicable. As failure leads to a higher TDS rate, it encourages individuals and entities to file their Income Tax Returns regularly.
Improved financial transparency
Before section 194N, it was difficult for the Indian government to monitor and track large sums of cash withdrawn. Now, due to its TDS provisions, the government can track large sums of money moving through the banking system. This information is valuable for identifying suspicious activities and ensuring that funds are being used for legitimate purposes.
Also read: What is section 270A of the income tax act
Implications of Section 194N
A. Impact on individuals
The implementation of Section 194N carries several implications for individuals, especially those frequently handling large cash withdrawals:
- Increased compliance requirements for taxpayers who often withdraw substantial cash amounts.
- Encouragement to adopt digital payment methods over cash transactions.
- Enhanced monitoring of cash flows, aiding in the identification of suspicious activity.
B. Tax planning considerations
Individuals affected by Section 194N can consider these tax planning strategies to reduce their tax liabilities:
- Using digital payment methods to stay below cash withdrawal limits.
- Keeping thorough records of cash withdrawals to ensure accurate income reporting.
- Exploring investment avenues to lower taxable income and enhance tax efficiency.
When is Section 194N not applicable?
Section 194N provisions do not apply when payments are made to the following entities:
- Government bodies
- Banking companies
- Cooperative societies involved in banking
- Banking company business correspondents
- White-label ATM operators of any bank (including cooperative banks)
- APMC traders making payments to farmers
- Any other individuals or entities as notified by the government
Also read about: What is an inheritance tax
Latest changes in section 194N
Here are the latest changes in section 194N of the Income Tax Act:
- If the payer has not filed an ITR for the last three assessment years, TDS is liable to be deducted at the rate of 2% on amounts between Rs. 20 lakh and Rs. 1 Crore and 5% if the cash withdrawal amount is above Rs. 1 Crore in a financial year.
- If the payer has already filed the ITR for the current year, a TDS deduction is not required. The only requirement is to deduct TDS at 2% on withdrawal amount exceeding Rs. 1 Crore.
As per the latest changes, individuals and entities must meet the following requirements if they want to claim a reduced TDS under section 194N of the Income Tax Act:
- The payer must submit the ITR within the given time frame according to the provisions mentioned under section 139.
- Recently registered firms or business entities can not claim a reduced TDS deduction as they do not have any prior ITR returns filed.
- A bank or co-operative society must submit a statement stating their business of banking or post-office to file ITR for the last three assessment years.
Is Section 194N TDS refundable or not?
Section 194N of the Income Tax Act mandates Tax Deducted at Source (TDS) on cash withdrawals exceeding prescribed limits from banks and post offices. This TDS is refundable upon filing your income tax return.
The deducted TDS can be either:
- Adjusted against your total tax liability: If your total tax payable exceeds the TDS amount, the TDS can be offset against your tax liability, reducing your overall tax burden.
- Claimed as a refund: If you have no taxable income or if the TDS amount exceeds your tax liability, you can claim a full refund of the TDS.
Therefore, TDS under Section 194N is not a permanent tax and can be recovered through the income tax return filing process.
Also read about: What is dearness allowance
Points to remember
- Cash recipients cannot submit Form No. 15G/15H to the bank, nor can they request a lower TDS certificate under Section 197.
- When calculating the three preceding years, any assessment year for which the Section 139(1) return filing deadline has not passed should be excluded.
Conclusion
India has shifted towards a digital economy, where the majority of transactions are executed through digital methods. The push towards a digital economy started with the Indian government’s focus on discouraging cash payments by introducing section 194N of the Income Tax Act. Under its provisions, TDS is liable to be deducted on cash withdrawals exceeding Rs. 1 Crore at 2% for those who have filed income tax returns for the last three years. For non-filers, TDS is 2% on withdrawals over Rs. 20 lakh and 5% on withdrawals over Rs. 1 Crore in a financial year. The provisions help promote digital transactions and provide better monitoring of large cash transactions for the government to curb illicit use.
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