Section 194N of Income Tax Act – TDS on Cash Withdrawal

Section 194N of the Income Tax Act, also known as "TDS on cash withdrawal," is a provision that requires TDS for cash withdrawals that exceed certain thresholds. TDS Section 194N, which was added as a part of the Income Tax Act, of 1961, aims to promote digital payments, discourage cash transactions, and stop the flow of unreported funds. It covers Individuals, Hindu Undivided Families (HUFs), businesses, partnership firms, and other legal entities.

Section 194N of the Income Tax Act, 1961 went into effect on September 1st, 2019. By imposing TDS on cash withdrawals, it seeks to increase transparency, decrease cash transactions, and encourage the use of digital payment methods.

When someone withdraws money in cash from a bank, cooperative bank, or post office, TDS under Section 194N may be applied. The thresholds of Rs. 20 lakhs and Rs. 1 crore are specified under the 194N TDS section. TDS 194N will be withheld at the established rates if a person's cash withdrawal exceeds the threshold of Rs. 20 lakhs (for those who have not filed income tax returns for the last three assessment years- Non- filers) or Rs. 1 crore (for those who have filed- Filers).

Cash withdrawal TDS must be deducted by banks (including private, public, and cooperative banks) and post offices in accordance with Section 194N. The TDS rate under Section 194N is 2% on cash withdrawals over Rs. 1 crore for persons who have filed income tax returns regularly (Filers of income tax Return), and for persons who have not filed income tax returns in the last three assessment years (Non- filers of income tax return) is 2% on cash withdrawals over Rs. 20 lakhs and 5% over Rs. 1 crore.

Budget Updates Regarding Section 194N

The finance minister added Section 194N to the Union Budget 2019 to implement tax deduction at source (TDS) on cash withdrawals exceeding Rs 1 crore in an effort to deter cash payments.

The TDS threshold limit under Section 194N for those taxpayers who have not filed an income tax return in the last three assessment years is decreased to Rs 20 lakh from Rs. 1 crore in Budget 2020. If the taxpayer withdraws more than Rs 20 lakh in cash during the financial year, TDS will be taken at the prescribed rates.

The threshold amount for annual cash withdrawals has been raised to Rs. 3 crores for cooperative societies in Budget 2023.

Why Is Section 194N Introduced?

TDS on cash withdrawals over and above Rs. 1 crore under Section 194N has been introduced through the Finance Bill, 2019 to deter cash transactions in the nation and promote the digital economy.

Applicability of Section 194N

When a taxpayer withdraws more than Rs 1 crore in cash from a bank account in a financial year, Section 194N is applicable. This section will apply to withdrawals made by any taxpayer, including but not limited to:

• An individual
• A Hindu Undivided Family (HUF)
• A company
• A partnership firm or an LLP
• An AOP (Association of Persons) or BOIs (Body of Individuals)

Exemption from Section 194N

If payment is made to the person listed below, Section 194N will not be applicable.

• The Government
• Any bank, whether it is public or private
• Cooperative banks
• The post offices
• Business partners of a banking institution
• Any bank's white-label ATM providers
• The person who is one of its franchise's authorized dealers or agents or subagents
• Identified trader or commission agent working for the Agriculture Produce Market Committee (APMC) in accordance with Notification No. 70/2019-Income Tax dated September 20, 2019.
• A Full-Fledged Money Changer (FFMC) having a license from the RBI or its franchisees (subject to the terms of Notification No. 80/2019-Income Tax dated October 15, 2019).
• Any other person whom the Government of India has notified

How To Calculate the Threshold Limit?

When making a cash payment to an individual from the individual's bank account, the payer must deduct tax on amounts exceeding Rs 1 crore.

The threshold of Rs 1 crore limit in a financial year applies to each bank or post office account, not each taxpayer's account. For instance, if a person has three bank accounts with three different banks, he or she can withdraw money from each account in the amount of Rs 1 crore, or Rs 3 crore, without paying any TDS.

Only TDS under Section 194N will be applied to any cash withdrawals made by any taxpayer from the bank accounts that they maintain. For instance, if a bank pays its account holder (i.e., any taxpayer) in cash for more than Rs 1 crore in a financial year from the account the taxpayer maintains, the bank is required to deduct TDS.

If a bearer cheque worth more than Rs 1 crore is written by the taxpayer to a third party in a financial year, the third party receives the money instead of the account holder. The bank does not make the payment to the account holder in this scenario. It is unclear in the aforementioned scenario whether a bearer cheque issued to a person (such as a vendor) in order to collect payment from a bank will fall under section 194N. If a bearer cheque was issued to a third party, is the bank required to deduct tax from the account holder's funds?

Separately, under section 40(A)(3) of the Income Tax Act, a bearer cheque payment made for business purposes would not be recognized as an expense. The amount of any payment made per day (in a single transaction or cumulatively) cannot exceed Rs 10,000.

For payments made on or after September 1, 2019, Section 194N's provisions will be put into effect. But for cash withdrawals and payments made during FY 2019–20, there is a limit of Rs 1 crore. That means TDS will be deducted after September 1, 2019, however, the threshold of Rs. 1 crore shall be counted from 1st April 2019.

Who Will Deduct TDS Under Section 194N?

According to Section 194N, the person (payer) making the cash payment is required to deduct TDS. 

The list of these people is as follows.

• Any bank, both public and private
• Cooperative banks
• the post offices

The provisions of this section do not apply to certain groups of people (payees). Following is a list of them. 

• Any government agency
• A bank of any kind, including cooperative banks
• Any banking company's business correspondent, including cooperative banks
• Any bank, including cooperative banks, whose white-label ATM operators
• Payment to farmers is made by an APMC trader.
• Anyone else who has been notified by the government

Steps To Verify Applicability Of Section 194N

Banks or Financial institutions previously relied on the records provided by the recipient/ assessee/ deductee (account holder) to determine the recipients' ITR filing status.

The Central Board of Direct Taxes (CBDT) has enabled an online mechanism for determining the ITR filing status in an effort to streamline the procedure and help the deductor/s.

By visiting the income tax portal, the deductor, financial institutions, or banks can retrieve the recipient's filing status here. The department retrieves the ITR filing status, checks the 194N status, and provides the rate at which tax is to be deducted under Section 194N for the given PAN when the PAN is entered. There is no need to log in to the income tax portal for verifying the applicability of Section 194N, just follow the following steps.

• Step 1: Visit incometax.gov.in and Click “TDS On Cash Withdrawal” from the Quick Links.
• Step 2: Enter your PAN number and Mobile number and Click on the “Continue” tab.
• Step 3: Enter the OTP came on your Mobile number and Click on the “Continue” tab.
• Step 4: Check the Percentage of TDS by the Pop-up shown on the Screen.

Note: This rate varies for different taxpayers, depending on their income tax return filing status.

What is the Point Of TDS Under Section 194N?

When making a cash payment to the payee in excess of Rs 1 crore in a financial year, the payer must deduct TDS. Once the total amount withdrawn in a financial year exceeds Rs 1 crore, the payer will need to deduct TDS from the amount if the payee withdraws money at regular intervals.

Additionally, tax deductions will be made on amounts over Rs 1 crore.  For instance, if a person withdraws from his bank account Rs. 30 laksh, Rs. 35 lakhs and  Rs. 34 lakhs in each first three quarters. Rs.  Rs 99 lakh in total during the financial year and then withdraws Rs 1,50,000 in the last quarter, the TDS liability only applies to the excess of Rs 50,000 only.

Rate of TDS Under Section 194N

In Case of Filers of Income Tax Returns

• According to Section 194N, the bank or financial institution is required to deduct TDS at a rate of 2% on cash withdrawals of more than Rs 1 crore in a financial year.
• TDS in the aforementioned example would therefore be on Rs 50,000 at 2%, or Rs 1,000.

In the case of Non- filers of Income Tax Returns

The amount that can be deducted from taxes is limited to Rs 20 lakh if the person receiving the money has not filed an income tax return in the three years immediately before the year.

The TDS is going to be taken out at:

• 2% on cash withdrawals and payments totalling more than Rs 20 lakh and up to Rs 1 crore
• 5% for withdrawals over Rs 1 crore

Examples of TDS Deduction Under Section 194N

When the payee has a single bank account

During the financial year 2022–23, Mr Sanat withdrew the following amounts from his Bank.

• May - Rs. 20 lakhs
• July - Rs. 25 lakhs
• August - Rs. 25 lakhs
• November - Rs. 30 lakhs
• December - Rs. 20 lakhs

He has not submitted his ITR for the financial years 2019–2020, 2020–21, or 2021–2022, and the deadline for submitting his return for these years has passed.

The bank will be required to deduct TDS in the following manner.

• May - No TDS (since the capping is Rs. 20 lakhs)
• July - TDS at the rate of 2% on Rs. 25 lakhs = Rs. 50,000
• August - TDS at the rate of 2% on Rs. 25 lakhs = Rs. 50,000
• November - TDS at the rate of 2% on Rs. 30 lakhs = Rs. 60,000
• December - TDS at the rate of 5% on Rs. 20 lakhs = Rs. 1,00,000

Section 194N also applies to withdrawals made from a single account or multiple accounts held with the same bank.

Let’s take one more example to understand the transaction.

When the payee has multiple bank accounts

Mr Sanat is regular in filing his income tax returns. Throughout the financial year, Mr Sanat withdrew money from the following banks:

• HDFC Bank - Rs. 60 lakhs
• Axis Bank - Rs. 50 lakh
• ICICI Bank - Rs. 1 crore

The limit of Rs. 1 crore is not reached in any of the banks in the example above, so no bank is required to deduct TDS under Section 194N.

Other Considerations Need to Know for TDS Under Section 194N

Due Date of Deposit of TDS Under Section 194N

Issue of TDS Certificate

The Financial Institutions, Banks or deductors will be required to issue a TDS certificate to the deductee in form 16A within 15 days from the due date of furnishing the TDS Return for 194N.

The deductee may claim a TDS credit in their income tax return. Additionally, Form 26AS on the income tax department website contains information about the tax deducted in accordance with section 194N.

Filing of TDS Return

A Financial Institution Bank or other deductors who have made a deduction of TDS cash withdrawal is required to submit TDS reports in accordance with Section 194N of the Income Tax Act. As a result, they must file quarterly returns on Form 26Q by the last day of the month following the quarter's end. The following are the due dates.

Points To Remember for Section 194N

The cash recipient is not permitted to submit Form No. 15G/ 15H to the bank or request a lower deduction certificate under Section 197.
If the due date of return under section 139(1) of any assessment year has not yet passed, that assessment year is not to be taken into account when determining the three years immediately before the year.
 

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