TDS on cash withdrawals- Detailed Analysis

The Finance Act, 2019 introduced Section 194N to provide for tax deduction on cash withdrawals. This move was intended to discourage cash transactions and move towards digital and cashless economy. Section 194N prescribed for levy of TDS @ 2% on cash withdrawals from banks in excess of Rs. 1 crore in aggregate during the year. Later, the Finance Act, 2020 reduced the threshold limit for TDS to Rs. 20 Lakhs in case of taxpayers who have not filed their income tax returns for past 3 years. In this article, we will make a detailed analysis of section 194N as below:

Why section 194N has been introduced

Section 194N has been introduced by the Government with an intention to discourage cash transactions in the economy and move towards digital/ cashless economy.

What is the effective date of applicability of section 194N

The provisions of section 194N will be effective from 1^st September, 2019.

Section-194N reads as follows:

“Every person being, -

(i) a banking company to which Banking Regulation Act, 1949 applies (including any bank or banking institution referred in section 51 of the Act);
(ii) a co-operative society engaged in carrying on the business of banking; or
(iii) a post office

who is responsible for paying any sum, being the amount or the aggregate of amounts, as the case may be, in cash exceeding one crore rupees during the previous year, to any persons (recipient) from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to 2% of such sum, as income-tax.”

Who is liable to deduct TDS under section 194N

Following payers making cash payments (in excess of Rs. 1 crore in aggregate for the year) are liable to deduct TDS under section 194N:

Any Bank (Private or public sector)
Co-operative societies engaged in banking business
Post office

Thus, if you are holding account with any of the above and make cash withdrawals, TDS shall be deducted on cash withdrawal in excess of Rs. 1 crore from his one or more bank account maintained with that bank (subject to exception discussed below).

Proviso to section 194N states:

“Provided that in case of a recipient who has not filed the returns of income for all of the three assessment years relevant to the three previous years, for which the time limit for filing of return under section 139(1) has expired, immediately preceding the previous year in which the payment of the sum is made to him, the provisions of this section shall apply with the modification that-

(i) The sum shall be the amount of the aggregate of amounts, as the case may be, in cash exceeding Rs. 20 Lakhs during the previous year; and
(ii) The deduction shall be-

(a) An amount equal to 2% of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds Rs. 20 Lakhs during the previous year but does not exceed Rs. 1 crore; or
(b) An amount equal to 5% of the sum where the amount of aggregate of amounts, as the case may be, being paid in cash exceeds Rs. 1 crore during the previous year.”

What is the threshold limit for TDS under section 194N

If return of all the 3 preceding financial years not filed by the taxpayer:
(a) TDS @ 2% on the cash withdrawals exceeding Rs. 20 Lakhs but not exceeding Rs. 1 crore during the year in aggregate
(b) TDS @ 5% on the cash withdrawals exceeding Rs. 1 crore.

In other cases:
In other cases, the threshold limit for deduction of tax under section 194N will be Rs. 1 crore. It means that if the taxpayer is regular in filing his return of income, then TDS shall be deducted on cash withdrawals in excess of Rs. 1 crores @ 2%.

What is the rate of TDS under section 194N

As discussed above, the rate of TDS will be either 2% or 5% depending upon the return filing status of the taxpayer. Higher rate of 5% is applicable only where a person has not filed his return for all of the 3 preceding financial years and cash withdrawals exceeds Rs. 1 crore.

The accountholder has not filed ITR for all the 3 preceding financial years	In any other case
Upto Rs. 20 Lakhs: Nil Rs. 20 Lakhs to Rs. 1 crore: 2% Above Rs. 1 crore: 5%	In excess of Rs. 1 crore: 2%

Note:

In case, PAN is not provided by the assessee to bank, the bank shall deduct TDS @ 20% in both the above cases.
In case of non-resident assessees or foreign companies, the above rate will be subject to addition of surcharge and education cess at applicable rates.
It is advisable to provide a copy of income tax return to bank so as to avoid tax deductions at the higher rates.

Is section 194N applicable on non-residents also

Yes, the provisions of TDS on cash withdrawals are applicable on non-residents also. If a NRI withdraws cash from his NRE account, then the bank will deduct TDS at 2% or 5% depending upon the above threshold limits.

I have bank accounts with State Bank of India in 3 different branches of which 2 are current accounts and 1 is saving account. My cash withdrawals from all the 3 accounts during the year is Rs. 40 lakhs, Rs. 50 lakhs & Rs. 20 lakhs respectively. Is TDS deductible under section 194N

Since, the cash withdrawals have crossed the limit of Rs. 1 crore in aggregate in State Bank of India in your case, the bank is liable to deduct TDS @ 2% on excess of Rs. 1 crore i.e. 10 lakhs *2% = Rs. 20,000.
Please note that cash withdrawals from two different banks shall not be aggregated to check threshold limit of Rs. 20 lakhs/ Rs. 1 crore.

Can we submit lower TDS certificate for the purpose of section 194N

No, lower TDS certificate can not be submitted for the purpose of the provisions under section 194N.

Provided also

“that nothing contained in this section shall apply to any payment made to-

(i) the Government;
(ii) any banking company or co-operative society engaged in carrying on the business of banking or a post office;
(iii) any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the guidelines issued in this regard by RBI;
(iv) any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorisation issued by the RBI;”

Who are exempted from the TDS provisions of section 194N

In accordance with above, the following payee are not liable for TDS @ 2% or 5% if they make cash withdrawals from their bank accounts:

Government
Any banking company or co-operative societies engaged in banking business
Post Office
Any business correspondent of a banking company or co-operative societies engaged in banking business
Any white label ATM operators of a banking company authorised by RBI
Such other class of persons as notified by the Central Government

What are the notified category of taxpayers exempted from the provisions of section 194N

Commission agents or traders, operating under Agriculture Produce Market Committee (APMC), and registered under any law relating to Agriculture Produce Market of the concerned state are exempted from the provisions of tax deduction under section 194N.
However, he will have to intimate to the banking company or co-operative society or post office his account number through which he wishes to withdraw cash in excess of Rs. 1 crore along with his PAN.
Further, he will also certify to bank/ co-operative society/ post office that the cash withdrawals in excess of Rs. 1 crore is for purpose of making payments to farmers on account of purchase of agriculture produce.
Refer Notification No. 70/2019 dated 20th September 2019

Is section 206AB (TDS on non-filers of return) applicable in the cases covered by section 194N

Section 206AB specifically excludes section 194N. Therefore, if TDS is required to be deducted under section 194N, the provisions of section 206AB shall not be applied for higher rate of tax deduction in case of non-filers of return.

Also read: Clarification on TDS on cash withdrawals

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