To discourage cash transactions, the finance ministry through the union budget has introduced TDS on Cash Withdrawal under Section 194N.
The finance minister of India, Mrs. Nirmala Sitharaman, through her first union budget in 2019, has introduced a Section 194N. Under this section, a TDS (tax deducted at source) is charged on ‘Cash’ withdrawals exceeding Rs. 1 Crore. The introduction of this section was done with the aim to discourage the practice of cash transaction or making payments in cash. Let us discuss the new Section 194N in detail.
The government of India through its finance ministry has introduced Section 194N that charges TDS on cash transactions above Rs 1 crore. This move is taken to promote digital transactions and discourage Indian citizens from making cash transactions.
Section 194N states that an individual shall be charged with 2% TDS for carrying out cash transactions amounting to more than Rs. 1 Crore in a financial year. The TDS shall be applicable on every cash transaction above Rs. 1 crore. This is why Section 194N came into effect from 1st September 2019.
Section 194N will apply to taxpayers who make withdrawals above Rs. 1 crore including:
Above is the list of recipients on whom Section 194N is applicable. However, there are certain recipients on whom Section 194N is not applicable. Following is the list of recipients to whom Section 194N does not apply:
Thus, no TDS shall be deducted on the cash withdrawal made by above given recipients from any bank or post office.
The responsibility to deduct tax towards withdrawal of the money (more than Rs. 1 Crore) is vested on the payer i.e. payer is responsible to deduct TDS on cash withdrawal. Section 194N defines the payer as an entity who is making the cash payment to the recipient. Following is the list of payers eligible to deduct TDS on cash withdrawal above Rs. 1 Crore.
The finance minister Mrs. Nirmala Sitharaman had introduced Section 194N in the Union Budget in order to provide momentum to the digital payments in India. The major factors for introduction of Section 194N are:
The importance of promoting digital transactions is to encourage white label transaction and curb or put a fix on black money. Many business entities in India still practice business payments in cash. In order to slash this practice, the best way was to introduce tax on cash transactions that are exceeding Rs. 1 Crore in one financial year from one bank account.
The TDS on cash withdrawal exceeding Rs. 1 Crore shall be deducted at 2% on cash withdrawal over and above Rs. 1 Crore. For example: if Mr. X has withdrawn Rs. 98 Lakhs till date from his bank account and today is withdrawing another Rs. 2.50 lakhs, then the TDS shall be deducted on the amount exceeding Rs. 1 Crore i.e. Rs. 50,000. Therefore, as per the given scenario the TDS shall be deducted at 2% on Rs. 50000 i.e. Rs. 1000.