Section 194N | TDS on Cash Withdrawals

Overview

In India, Tax Deducted at Source (TDS) is a mechanism to collect tax at the source from where the income is generated. The government has introduced TDS provisions across various financial transactions, including cash withdrawals, to curb tax evasion and increase tax compliance. One such provision relates to TDS on cash withdrawals covered under Section 194N of Income tax act, 1961 above a certain threshold.

What is Section 194N, TDS on Cash Withdrawals?

TDS on cash withdrawals is applicable when an individual or entity withdraws a large amount of cash from a bank account. The tax is deducted by the bank at the time of withdrawal and is remitted to the government on behalf of the taxpayer. This mechanism is designed to track large cash transactions and discourage the hoarding of unaccounted money. The provision for TDS on cash withdrawals was introduced under Section 194N of the Income Tax Act, 1961. The section specifies the TDS rates applicable to cash withdrawals, which vary based on the amount being withdrawn and the type of account holder.

Applicability of Section 194N, TDS on Cash Withdrawals

This section is applicable to any person withdrawing cash from:

• A banking company or any bank or banking institution.
• A co-operative society engaged in carrying on the business of banking or
• 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 ₹1 Crore/ ₹3 Crore in case the recipient is a co-operative society, during the financial year, to any person from one or more accounts maintained by the recipient.

Threshold limit u/s 194N, TDS on Cash Withdrawals

TDS is levied only on cash withdrawals exceeding certain limits. The applicable threshold limits u/s 194N are as follows:

• For persons (not filed ITR for the last 3 previous years): TDS is applicable if the cash withdrawal exceeds ₹20 lakh in a financial year.
• For co-operative society: TDS is applicable if the cash withdrawal exceeds ₹3 Crore in a financial year.
• For others: TDS is applicable if the withdrawal exceeds ₹1 crore in a financial year.

These limits are cumulative across all cash withdrawals made by an individual or business during the financial year. The TDS is calculated on the total amount withdrawn that exceeds the specified threshold.

For example: A person has duly filed his IT returns and withdrawn cash ₹1.2 Crores from a private bank, TDS under section 194N will attract only the amount that exceeds the threshold that is ₹20 Lakhs. Therefore the bank is required to deduct and deposit TDS on ₹20 Lakhs only and not on the whole amount withdrawn that is ₹1.2 Crore.

TDS rates u/s 194N, TDS on Cash Withdrawals

The TDS rate on cash withdrawals under section 194N of income tax act 1961 are as follows:

Note: TDS under this section is applicable as “per account basis” and not PAN india basis. For example, if an assessee has 2 separate bank accounts in 2 different banks, he can easily withdraw ₹2 Crore without TDS from two different bank accounts. 1 Crore from one bank and another 1 Crore from another bank. But, if he withdraws the whole amount of ₹2 Crore from one bank TDS will be applicable.

Why is TDS on Cash Withdrawals Imposed?

The primary purpose of imposing Section 194N, TDS on cash withdrawals is to promote the digitization of payments and reduce reliance on cash, which is harder to track. Cash transactions, especially large ones, are often associated with the risk of tax evasion, money laundering, and the circulation of black money. By introducing TDS on cash withdrawals, the government aims to:

• Increase Transparency: Cash withdrawals, especially in large amounts, often indicate business or income activity that should be subject to taxation. TDS ensures that such transactions are reported and taxed appropriately.
• Encourage Digital Transactions: The levy of TDS on cash withdrawals above certain limits encourages individuals and businesses to move toward more transparent and traceable digital payments and transfers.
• Prevent Tax Evasion: By monitoring large cash withdrawals, the government can identify potential cases of tax evasion, unaccounted income, and other illicit financial activities.

When to deduct and deposit TDS u/s 194N?

Time of deduction:
TDS is deducted when cash is withdrawn from a bank account. It is the responsibility of the bank or financial institution to deduct the tax before handing over the cash.

In simple words “TDS is deducted at the time of payment”.

Who can deduct TDS u/s 194N?
TDS under section 194N is required to be deducted by payer which are:

• Banking company
• Cooperative banks
• Post office

Time to deposit:
TDS on Cash Withdrawals which is deducted u/s 194N and is required to be deposited to the central government. Time to deposit of TDS on Cash Withdrawals is given below:

For example, TDS on Cash Withdrawals is deducted on 15th December and needs to be deposited on or before 7th January. Tax on cash withdrawal is deducted on 21st March ; needs to be deposited on or before 30th April.

Who is exempt from TDS on cash withdrawals u/s 194N?

Following are exempt from TDS under section 194N if:

• Cash withdrawn by Cash Replenishment agencies (Agencies related to operation of ATMs).
• Cash withdrawn by commission agents operating under APMC (Agricultural Produce Market Committee).
• Authorized money exchange dealers who withdraw cash for purchase of Foreign currency.
• No TDS on cash withdrawals under section 194N is required to be deducted if payment is made to government, banks, cooperative societies (engaged in the business of banking) or any other person notified by the government.

Penalty for non-compliance u/s 194N, TDS on Cash Withdrawals

Failure to comply with TDS provisions u/s 194N, can result in penalties and interest. Individuals or businesses who withdraw large amounts of cash and do not comply with TDS provisions of section 194N could face scrutiny from the tax authorities. Some of the penalties are:-

• Penalty for Non-Deduction of TDS:
  If the person or financial institution fails to deduct TDS as required under Section 194N, they may be subject to a penalty. The penalty could be equivalent to the amount of TDS that was required to be deducted but was not deducted.
• TDS is not deducted:
  If a deductor has not deducted the TDS as required under Section 194N, it charges interest of @1% per month till the date TDS is deducted.
• TDS is deducted but not deposited:
  If a deductor has deducted the TDS as required under Section 194N but has not deposited the collected tax to the government, then it charges interest @1.5% from the date when tax is deducted to the date of deposition.

How is TDS on Cash Withdrawals reported?

Banks and financial institutions are required to submit a TDS return to the government, reporting the amount deducted on behalf of the account holder. The deducted tax is also reflected in the “Form 26AS” (Tax Credit Statement), which is available to taxpayers through their Income Tax Department login.

Taxpayers can use this information to verify if the TDS has been correctly deducted and adjust the same in their income tax returns. In case of any discrepancy or if TDS has not been deducted despite being applicable, taxpayers should contact the bank or financial institution for resolution.

Why Choose Bizfoc for TDS?

At Bizfoc, we specialize in providing you the best accounting services in filing your TDS. Here are the reasons why we are known for our services to our clients on filing TDS:

• Assist in suggesting the right documents for TDS filing.
• Providing valuable insights on sections of TDS computations
• Prescribe forms as per the necessity
• Helps in accurate computations for TDS computations and returns
• Tailored advice and guidelines for TDS filing

In general, we assist the client to solve their queries and doubts regarding the documentation, procedures, and fees for filling out the form. Other than making your filing successful, we help you make a better decision by covering every aspect of what you actually need to get your TDS.

Conclusion

TDS on cash withdrawals is a significant step towards enhancing the transparency and accountability of financial transactions in India. While it may seem like an added burden, the provision aims to discourage the use of unaccounted cash, promote digital transactions, and ensure that all taxpayers are paying their fair share of taxes.

Individuals and businesses should be aware of the thresholds and rates to avoid any surprises when making large cash withdrawals. Moreover, understanding how TDS works will help taxpayers ensure that the correct amount of tax is being deducted and that it is properly reflected in their tax filings.

Frequently Asked Questions? (FAQs)