TDS on Cash Withdrawal Under Section 194N Of Income Tax Act & Its Provisions
The Union Budget of 2019 introduced Section 194N of the Income Tax Act, imposing a TDS on cash withdrawals beyond Rs. 1 crore. The Government of India (GOI) took this step to promote digital payments and reduce the usage of paper money. After Budget 2020, the threshold limit was further reduced to Rs. 20 lakh for taxpayers who had not filed income tax returns for the last three years. Now, let us examine the provisions and exceptions of Section 194N in more detail.
Provisions under Section 194N of the Income Tax Act
Section 194N levies TDS (Tax Deducted at Source) at a rate of 2% for TDS on cash withdrawals over the threshold limit of Rs. 1 crore. The TDS is applicable on the excess amount over the threshold limit withdrawn in the previous financial year.
Section 194N is applicable at a rate of 2% only when the person filing it has filed ITR (income tax returns) for the previous three years. If they have not filed ITR, a 2% rate is applicable for withdrawals over Rs. 20 lakh and 5% for withdrawals over Rs. 1 crore.
Reasons behind Introduction of Section 194N
Finance Minister Nirmala Sitharaman introduced Section 194N in Union Budget 2019 primarily to discourage cash payments. This is mainly applicable for TDS (Tax Deducted at Source) on cash withdrawals that exceed Rs. 1 crore.
Finance ministry, in Union Budget 2020, reduced the TDS limit under Section 194N to Rs. 20 lakh for taxpayers who haven’t filed ITR for the previous 3 years. IT Department will deduct tax at the prescribed rate if the taxpayer withdraws cash exceeding Rs. 20 lakh.
Who Is Responsible for Deducting TDS on Cash Withdrawal under Section 194N?
Any person responsible for paying a sum or aggregate of sums over the specified limit must deduct 2% of the sum from the recipient’s account.
The following entities have to make the deduction from the recipient’s authorised account.
- Banking company under the Banking Regulation Act, 1949 (This includes any bank or banking institution covered under Section 51 of the Act)
- Post office
- Co-operative society providing banking services
The following tax-paying entities are liable to pay this income tax:
- Individuals
- Companies
- Partnership firms or LLPs
- HUF (Hindu Undivided Family)
- Local authorities
- AOPs (Association of Persons)
- BOIs (Body of Individuals)
Advantages of TDS Deduction u/s 194N of Income Tax Act
Given below are the advantages of TDS deduction under this particular section:
- IT department can access data related to huge cash transactions. They can investigate easily if any discrepancies arise.
- People will veer away from traditional ways of transaction. This is because huge cash withdrawals will lead to TDS liabilities.
- Section 194N will promote digital payments with a proper automated system.
Exceptions under Section 194N of the Income Tax Act
TDS is not applicable u/s 194N for withdrawals made by the following entities:
- Government (Central or State)
- Banks (public or private)
- Post offices
- Co-operative banks
- Persons notified by the government in consultation with RBI
- RBI-licensed authorised dealers, sub-agents, franchise agents or FFMCs (Full-Fledged Money Changer)
- Business correspondents of banks
- White Label ATM operators of any bank and CRAs (Cash Replenishment Agencies)
- Commission agents or traders operating under APMC (Agriculture Produce Market Committee)
Also read: Section 80C Of The Income Tax Act of India and How Mutual Funds Can Help In Claiming Tax Exemptions
TDS Rate under Section 194N of Income Tax Act
The Income Tax department deducts TDS at 2% on cash withdrawals exceeding Rs. 20 lakh. IT department will deduct TDS at 5% for cash withdrawals that exceed Rs. 1 crore. Both the rates are applicable if the person withdrawing cash has not filed Income Tax Returns for the preceding 3 assessment years.
Limitations Associated with Section 194N of Income Tax Act
Given below are important points associated with Section 194N of ITA:
- The amount limit of Rs. 1 crore is applicable for one or more bank/post office accounts maintained by the individual. It is not calculated on the basis of a taxpayer’s account.
- For example, if a bank makes a cash payment exceeding the limit of Rs. 1 crore to an account holder from his bank account, the bank will have to deduct TDS.
Now, if a taxpayer issues a bearer cheque exceeding Rs. 1 crore, the account holder or taxpayer is not the recipient of the cash, someone else is.
It is unclear whether payers will have to deduct tax from the account holder concerning the cheque issued to the third person.
There is a lack of clarity on whether Section 194N of ITA will cover such payments or not. This is an important limitation associated with this particular section.
Steps to Calculate TDS under Section 194N and Sample Illustration
The case study below illustrates the steps to calculate TDS u/s 194N:
Suppose Anuj has withdrawn the following amounts during the financial year 2020-2021 and has not filed Income Tax Returns for 2017-2018, 2018-2019 and 2019-2020. Now, the due date for filing ITR has expired.
The table below shows the tax to be deducted:
| Date | Withdrawal Amount | Aggregate Amount Withdrawn to the Given Date | TDS Rate | Calculation | Tax to be Deducted |
| 02/04/2020 | Rs. 15 lakh | Rs. 15 lakh | NA | NA | NA |
| 22/07/2020 | Rs. 25 lakh | Rs. 40 lakh | 2% | (Rs. 40 lakh – Rs. 20 lakh) X 2% | Rs. 40,000 |
| 26/08/2020 | Rs. 30 lakh | Rs. 70 lakh | 2% | Rs. 30 lakh X 2% | Rs. 60,000 |
| 05/09/2020 | Rs. 40 lakh | Rs 1.1 crore | 2% and 5% | (Rs. 40 lakh X 2%) + (10 lakh X 5%) | Rs. 80,000 + Rs. 50,000 = Rs. 1,30,000 |
| 19/10/2020 | Rs. 50 lakh | Rs. 1.6 Crore | 5% | Rs. 50 lakh X 5% | Rs. 2,50,000 |
Section 194N will apply if a taxpayer withdraws cash from accounts maintained in the same bank.
If Anuj had accounts with more than 2 banks and if he withdraws cash from all his bank accounts, it is the responsibility of the bank to deduct TDS as per the applicable rate.
Things to Know about Section 194N of the Income Tax Act
Here are a few additional things you should be aware of:
- Section 194N is applicable for cash payments exceeding Rs. 1 crore from 1 April of the previous year to 31 March of the current year.
- Financial institutions mentioned in this section generally make high-value payments in cheques only.
- TDS on cash withdrawals is not applicable if the account holder requests a bearer draft or a banker’s cheque.
- Following its introduction, all banks and similar entities u/s 194N must maintain records of cash payments worth more than Rs. 1 crore.
- If cash payment is made in bearer cheques and the account holder and recipient are not the same, no 194N TDS is deducted.
- The Rs. 1 crore limit is applicable for all accounts maintained by banks and similar entities. For example, if a taxpayer has a savings account and an overdraft account, this limit is applicable for withdrawals from both accounts.
Latest Amendments u/s 194N of ITA
Clause 84 of Finance Act 2020 amended Section 194N of ITA.
As per the amendment-
- TDS will be deducted at the rate of 2% if the taxpayer has not filed ITR for 3 years.
- TDS will be applicable at 2% for cash withdrawals over Rs.20 lakh but less than Rs. 1 crore in a year.
- TDS will be charged at the rate of 5% if cash withdrawals exceed Rs. 1 crore.
- If the taxpayer has filed ITR for a specific financial year, there will not be any TDS reduction.
- If the taxpayer has withdrawn more than Rs. 1 crore in cash, there will be a 2% tax reduction on the amount.
Time Limit to File ITR u/s Section 194N
If the entity withdrawing money has not filed ITR for three years and the time limit to do so has also expired, a higher TDS rate is applicable. For this purpose, the expiry time limit is considered for three previous years prior to the withdrawal date. This means that if the date of ITR filing u/s 194N has not expired, it will not be considered for the assessment year.
For example, if you have made cash withdrawals on 31 August 2021, return filing compliance is checked for financial years 2017-18, 2018-19 and 2019-20. If you have filed ITR for any of these years, TDS is deducted at a 2% rate for a withdrawal sum of more than one crore rupee.
How to find the Threshold Limit u/s 194N of the Income Tax Act?
Tax is deducted by the payer when paying cash to the recipient from a bank or post office account. A 2% TDS on cash withdrawal is deducted in excess of Rs. 1 crore for those who have filed ITR at least once in the last 3 years. For those who have not, 2% TDS is applicable for withdrawals of Rs. 20 lakh and 5% if the sum exceeds Rs. 1 crore.
The following example will demonstrate how to find the TDS limit for taxpayers:
Mr Singh has made the following withdrawals during FY 2020-21. He has not filed ITR for FY 2017-18, FY 2018-19, and FY 2019-20.
| Date of Withdrawal | Amount Withdrawn | Aggregate Amount Withdrawn until Given Date |
| 3 April 2020 | Rs. 15 lakh | Rs. 15 lakh |
| 19 June 2020 | Rs. 50 lakh | Rs. 65 lakh |
| 10 August 2020 | Rs. 30 lakh | Rs. 95 lakh |
| 15 September 2020 | Rs. 45 lakh | Rs. 1.4 crore |
| 20 November 2020 | Rs. 60 lakh | Rs. 2 crore |
Here’s a tabular representation of the TDS applicable u/s 194N:
| Withdrawal Date | TDS Rate Applicable | Tax Computation | Tax to be Deducted |
| 3 April 2020 | 2% | Nil | Nil |
| 19 June 2020 | 2% | 2% of (65-20 lakh) | Rs. 90,000 |
| 10 August 2020 | 2% | 2% of (95-20 lakh) | Rs. 1.5 lakh |
| 15 September 2020 | 2% and 5% | 2% of Rs 5 lakh + 5% of Rs. 40 lakh | Rs. 2.1 lakh |
| 20 November 2020 | 5% | 5% of 60 lakh | Rs. 3 lakh |
Also Read: Best Tax-Saving Instruments In India
Final Word
Section 194N of the Income Tax Act is a step taken to discourage cash payments in the country and promote digital payments. Tax-paying entities who regularly file income tax returns can still withdraw up to Rs. 1 crore in cash without a TDS deduction. However, if they own multiple accounts in different banks, they can withdraw more cash.
FAQs on Section 194N
Ans: It is the responsibility of the post office to deduct TDS. They deduct TDS after making cash payments to an individual from their accounts. Post offices will deduct TDS at the rate of 2% if the amount exceeds Rs. 20 lakh and at the rate of 5% if the amount exceeds Rs. 1 crore.
Ans: The main objective behind Section 194N is to discourage high-value transactions in cash and pave the way for digital payments in the country. In addition, the Income Tax Department can easily access dates of high-value cash transactions, which will reduce tax evasion and circulation of black money.
Ans: No, payments made through bearer cheques are not included as expenditure under Section 40(A)(3) of the Income Tax Act. Any payment made above Rs. 10,000 per day via single or aggregate transactions is not included as business expenditure.
Ans: Joint accounts have the same requirements and TDS rate under Section 194N of the Income Tax Act, 1961. This means that joint account holders are equally responsible for the operation of an account and have a common limit.
Let us take the example of a husband and wife who have withdrawn Rs. 92 lakh from their joint account. If the husband wants to withdraw Rs. 15 lakhs, the full TDS rate will be applicable.
Ans: Yes, Section 194N is applicable to all individuals, whether they are residents or non-residents. This means that if an NRI withdraws over Rs. 1 crore in a financial year from their NRE account in India, the bank will deduct TDS u/s 194N.
Ans: The recipient cannot apply for a lower deduction certificate u/s 197 and cannot furnish Form 15G/15H. You can use these forms to request banks not to deduct TDS u/s 194A when your income is below the taxable limit.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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