TDS on Cash Withdrawal - 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.

What is Section 194N?

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:

• An Individual
• A Hindu Undivided Family
• A company
• Partnership Firm
• Limited Liability Partnership
• A Local Authority
• An Association of Person or Body of Individuals

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:

• The Government of India
• Any Public Sector or Private Sector Bank who is into banking operation as per the guidelines laid down by Reserve Bank of India
• A Co-operative Society who is into Banking operation as per the guidelines laid down by Reserve Bank of India
• Any White Label ATM Operator or Co-operative Society carrying out banking operations as per the Reserve Bank India’s Payment and Settlement Systems Act, 2007
• Any person or class of person notified by the Government of India through gazette notification in consultation with Reserve Bank of India

Thus, no TDS shall be deducted on the cash withdrawal made by above given recipients from any bank or post office.

Who is responsible to deduct TDS under Section 194N?

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.

• Any Public Sector or Private Sector Bank
• A Co-operative Bank
• A Post Office

Why was the Section 194N introduced?

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:

• Promotion of digital transactions i.e. payments
• To make Indian Economy ‘Less Cash Economy’

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.

What is the rate at which TDS shall be deducted?

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.

Important Points to note

1. Section 194N is applied on cash withdrawals amounting more than Rs. 1 Crore during a financial year starting from 1st of April and ending on 31st of March of the consecutive year.

1. Section 194N will be applicable from the financial year 2019 – 2020. Hence, the amount withdrawn from 1st April 2019 shall be considered to calculate Rs. 1 Crore. However, the TDS shall be deducted post implementation of Section 194N i.e. after 1st September 2019 and not retrospectively.

1. The recipient i.e. the taxpayer can claim TDS while filing Income Tax Return at the end of the financial year.

1. The Rs. 1 Crore ceiling amount is for per account maintained by the taxpayer i.e. recipient across various banks. For example: if Mr. X is holding banking accounts in 3 banks then he can withdraw Rs. 1 Crore from each account without bearing TDS on cash withdrawal u/s 194N.

1. The Bank account maintained by the recipient can be any banking account i.e. savings account, current account, etc.

1. If a respective account holder does payment to the client through bearer cheque, then such a transaction does not attract TDS i.e. a payment made through bearer cheque does not qualify for TDS as the TDS is charged on cash withdrawals under Section 194N.

1. It is mandatory for all banks and post office to maintain a precise record of every cash payment made by them which is exceeding Rs.1 Crore in the previous year.

1. As per the provisions of Section 194N, in cases where the account holder and recipient of the cash payment are same and the cash payment is made via bearer cheque, TDS shall not be deducted.

1. The provisions of the Section 194N suggest that the deduction is in accordance to provisions of Income Tax.
2. There are certain payments that are exempted from the ambit of TDS under Section 194N like payments made to government of India, payments made to banks, Co-operative Societies and Post Office.