In order to promote digital financial transactions and curb cash transactions, the government has introduced Section 194N in the Union Budget of 2019. This section is further amended by the Finance Act 2020, where tax has been imposed in the form of TDS on cash withdrawal above Rs 1 crore by any taxpayer.
What is Section 194N?
This section has imposed a responsibility on every person, who is
- a bank to which the Banking Regulation Act applies;
- a co-operative society who is engaged in the business of banking; or
- a post office
to deduct TDS at the rate of 2% on any amount or the aggregate of amounts paid to a recipient, where such amount or aggregate of amounts exceeds Rs one crore during the previous year, from one or more of the accounts maintained by the recipient.
Who is the recipient?
Recipient, according to this section, shall be any of the following persons who makes cash withdrawals:
- An Individual
- A Hindu Undivided Family
- A Partnership or an LLP
- A Company
- Association of Persons (AOP)
- A Local Authority
- Body of Individuals (BOI)
When is Tax to be deducted?
TDS at the rate of 2% shall be deducted where any person withdraws cash from one or more of his bank accounts or post office accounts and such amounts exceeds Rs one crore. Thus when a person withdraws cash at regular intervals, the TDS shall be deducted only after the total withdrawal of cash exceeds Rs one crore. For eg: If Mr. X withdraws Rs 50 lakhs on a particular day and thereafter, he withdraws Rs 70 lakhs, then the bank or post office, as the case may be, shall deduct TDS on amount of Rs 20 lakhs. For this, the limit of one crore shall apply for each bank or post office and not each account of the person. For eg., if an individual has two accounts with two branches of a same bank, the limit of his withdrawal will be Rs. one crore. However, if an individual has two accounts with two different banks, the limit of his cash withdrawal shall be for each bank, i.e. 1 crore each making it to two crores.
Amendment to Sec 194N
Section 194 N is further amended by Finance Act 2020, where if any person who is making cash withdrawal, has not filed the tax return for three years and where the cash withdrawal exceeds Rs 20 Lakhs, in such cases, TDS shall be deducted at the rate of 2% on the amount of cash withdrawal exceeding Rs 20 lakhs and such withdrawal do not exceed Rs one crore. Further, if any such person withdraws cash exceeding Rs one crore, the rate of TDS shall be 5% on the amount exceeding Rs one crore.
For eg: Mr. X has not filed his tax return during previous three financial years and he withdraws cash from his bank account during regular time intervals, and where such withdrawal aggregates Rs 1.40 crore during the previous year, the bank shall deduct TDS at the rate of 2% once the total amount of cash withdrawal exceeds Rs 20 Lakhs up to Rs one crore. TDS shall be deducted at 5% once the amount of cash withdrawal exceeds one crore.
Date of applicability of amendment
The amendment made to Sec 194N shall be applicable from 1stJuly 2020.
Non-Applicability of Sec 194N
The provision of Section 194N shall not apply if the cash withdrawal is made by the following persons:
- Government Body
- Banks (including Co-operative Banks)
- White label operator of any bank (including Co-operative Banks)
- Any Business Correspondent of any Banking Company (including Co-operative Banks)
- Farmers – Commission Agent or any trader who operates under Agriculture Produce Market Committee
- Authorized dealer and its franchise agent and sub-agent and a Full Fledged Money Changer and it’s franchise agent who is licensed by Reserve Bank of India, subject to certain conditions specified in the Notification No 80/2019 of the Income Tax.
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