Section 194N: Cash Withdrawal TDS Explained

In an effort to promote digital transactions and curb the flow of black money, the Government of India introduced Section 194N under the Income Tax Act. This section mandates the deduction of Tax Deducted at Source (TDS) on cash withdrawals exceeding certain thresholds. Here’s a comprehensive look at the provisions, implications, and operational aspects of Section 194N.

Introduction to Section 194N

Section 194N was introduced in the Union Budget 2019 and became effective from September 1, 2019. It was enacted to dissuade large cash withdrawals from banks and post offices, encouraging the use of digital payments instead. The section outlines the requirements for deducting TDS on cash withdrawals by specified entities and individuals.

Applicability of Section 194N

The TDS provision under Section 194N applies to withdrawals made by the following entities:

• Individual account holders
• Hindu Undivided Families (HUFs)
• Companies
• Firms
• Cooperative societies
• Local authorities
• Association of Persons (AOPs) or Body of Individuals (BOIs)
• Artificial Juridical Persons (AJPs)

It does not apply to withdrawals made by:

• The Central or State Government
• Banks, including cooperative banks
• Post offices
• Business correspondents of banking companies
• White-label ATM operators
• Other persons or class of persons notified by the government

Thresholds and Rates of TDS

The TDS rate and threshold for cash withdrawals under Section 194N vary based on the account holder’s compliance with filing income tax returns.

For Non-Filers of Income Tax Returns

For individuals and entities that have not filed their income tax returns for the previous three financial years, the TDS deduction is as follows:

• Exceeding ₹20 lakh but up to ₹1 crore: 2% TDS
• Exceeding ₹1 crore: 5% TDS

For Regular Filers of Income Tax Returns

For those who have filed their income tax returns for the previous three financial years, the threshold is higher:

• Exceeding ₹1 crore: 2% TDS

Calculation of TDS Under Section 194N

TDS is calculated on the amount exceeding the prescribed threshold. Let’s look at a couple of examples to understand this better.

Example 1: Regular Filers

Mr. A, who has filed his income tax returns for the last three years, withdraws ₹1.5 crore in a financial year.

• Total withdrawal: ₹1.5 crore
• Threshold: ₹1 crore
• Amount exceeding threshold: ₹1.5 crore - ₹1 crore = ₹50 lakh
• TDS @ 2% on ₹50 lakh: ₹1 lakh

Example 2: Non-Filers

Company B, which has not filed income tax returns for the last three years, withdraws ₹1.5 crore in a financial year.

• Total withdrawal: ₹1.5 crore
• Threshold for 2% TDS: ₹20 lakh
• Amount exceeding ₹20 lakh but up to ₹1 crore: ₹1 crore - ₹20 lakh = ₹80 lakh
• TDS @ 2% on ₹80 lakh: ₹1.6 lakh
• Amount exceeding ₹1 crore: ₹1.5 crore - ₹1 crore = ₹50 lakh
• TDS @ 5% on ₹50 lakh: ₹2.5 lakh
• Total TDS: ₹1.6 lakh + ₹2.5 lakh = ₹4.1 lakh

Operational Mechanism

The responsibility for deducting TDS under Section 194N lies with the payer, which could be a bank, cooperative bank, or post office. Here’s a step-by-step guide on how it is implemented:

1. Withdrawal Request: The account holder initiates a withdrawal that exceeds the specified threshold.
2. TDS Deduction: The bank/post office calculates the applicable TDS based on the withdrawal amount and the account holder’s tax filing status.
3. Payment to Government: The deducted TDS amount is remitted to the government by the 7th of the subsequent month.
4. TDS Certificate: The deductor issues a TDS certificate (Form 16A) to the account holder, detailing the amount deducted.

Compliance and Reporting

Compliance with Section 194N involves regular filing and reporting by the deductor. They must:

• File quarterly TDS returns in Form 26Q.
• Issue TDS certificates to the deductees.
• Maintain accurate records of all transactions subject to TDS.

Implications for Account Holders

For account holders, the introduction of Section 194N necessitates careful planning of cash withdrawals to minimize TDS liability. Here are some key implications:

• Increased Cost: Frequent or large cash withdrawals could result in significant TDS deductions, impacting liquidity.
• Tax Compliance: Regular filing of income tax returns helps avail higher thresholds, reducing the TDS impact.
• Digital Transactions: Encourages the shift towards digital payment methods, reducing dependency on cash.

Conclusion

Section 194N is a strategic move by the Indian government to discourage large cash transactions and promote digital payments. Understanding its provisions, applicability, and operational mechanisms can help taxpayers and businesses manage their cash flow efficiently and comply with tax regulations. By keeping abreast of these requirements, one can ensure minimal disruptions and better financial planning.

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