3 days ago9 min read

Section 194N: Understanding TDS on Cash Withdrawal

Section 194N of the Income Tax Act was launched to dissuade cash transactions and foster the objective of Digital India. This initiative maximises the possibility that people use digital payment methods for their transactions when they are subject to Tax Deducted at Source (TDS) on cash withdrawals. By promoting a choice for digital transactions, this act seeks to change societal behaviour and support the government's objective of reducing the use of cash. Section 194N built a system for TDS on money transfers, which will be appropriate for the 2019–2020 fiscal year and go into effect on September 1, 2019. Section 194N, its applicability, allowances, and the relevant TDS rates are covered in greater detail ain this article.

What is Section 194N of the Income Tax Act?

Section 194N applies to any cash withdrawals from a bank account, cooperative, or post office that total more than Rs 1 crore in a fiscal year. It will be relevant to all cash withdrawals or a combination of cash withdrawals from a particular bank during a financial year. The following withdrawals made by any taxpayer will be covered by this section:

A person
An Undivided Hindu Family (HUF)
A business
An LLP or a partnership firm
A group of people (BOI) or an association of people (AOP)

However, it won't be relevant if money is sent to

The Government
Any bank, whether public or private
A bank that works cooperatively
A post office
Business correspondents of a banking institution, by Notification No. 70/2019-Income Tax dated September 20, 2019,
White Label ATM operators of any bank,
Specified vendors, or commission agents working under the Agriculture Produce Market Committee (APMC).
An RBI-licenced Full-Fledged Money Changer (FFMC), subject to the terms of Notification No. 80/2019-Income Tax dated October 15, 2019.
An authorised dealer, or an agent/sub-agent of its franchise,
Any other individual informed by the Indian government

Purpose of Section 194N of the Income Tax Act

When an insurer provides a beneficiary cash payments surpassing Rs. 1 crore in a financial year, they should deduct TDS (Tax Deducted at Source) in compliance with Section 194N. The payer must deduct TDS if the payee consistently withdraws cash and the sum withdrawn during the same fiscal year exceeds Rs. 1 crore. Notably, TDS is deferred from amounts over Rs. 1 crore. If a person takes out Rs. 99 lakh overall during the fiscal year and then takes out another Rs. 1.5 lakh, for example, TDS will only be implemented for the extra Rs. 50,000.

Key Benefits of Section 194N of the Income Tax Act

The Income Tax Act's Section 194N includes the following important advantages:

Promoting Electronic Transactions: Section 194N encourages the adoption of digital payment methods by imposing TDS on cash withdrawals that exceed certain limits, thereby fostering a cashless economy.
Enhanced Transparency: By declaring TDS deductions mandatory, financial transactions are clear, which reduces the possibility of tax evasion and urges taxpayer accountability.
Adherence to Regulations: TDS deductions by financial institutions guarantee that banks and taxpayers follow tax laws, resulting in an efficient tax collection system.
Awareness of Taxpayers: Section 194N's provisions encourage responsible financial behaviour by making taxpayers more aware of their economic transactions and the significance of adhering to tax laws.
Integration with Government Objectives: The section supports the government's holistic objectives of reducing cash dependence, deterring black money, and empowering a more beneficial taxation system.
Potential for reimbursements: TDS deductions under Section 194N allow taxpayers to recover excess tax deductions by asserting refunds or adjustments against their general income tax liability.

Who Deducts TDS Under Section 194N

Section 194N requires the individual (payer) making the cash payment to deduct TDS. These people's names are as follows:

Any bank, whether public or private
A bank that functions cooperatively
A postal service

The provision of a section will not relate to certain types of individuals (payees). The following is a list of them:

Any agency of government
Any banking institution, including cooperative banks
Any business correspondent of a financial institution, including cooperative banks
Any bank's white label ATM operator, including cooperative banks, that pays farmers through APMC
Any other individual the government has informed

Point of Deduction of TDS under Section 194N

The payer can deduct TDS when the payee receives cash payments costing more than Rs 1 crore during a financial year. Even if a payee makes regular withdrawals, the payer has to deduct TDS when the payee withdraws more than Rs 1 crore in a fiscal year. Moreover, tax is deducted from any sum over Rs 1 crore. For instance, if a person withdraws Rs 99 lakh during the current financial year and retracts Rs 1,50,000 again, the TDS liability is on the Rs 50,000 excess.

TDS Rate under Section 194N

The TDS rate is determined by an individual taking out the money's return tax status. The following is a summary.

Cash withdrawal amount	For persons who have not filed an income tax return for 3 years	Other persons
Up to Rs. 20 Lakhs	Nil	Nil
Rs. 20 Lakhs-Rs.1 crore	2%	Nil
More than Rs.1 crore	5%	2%

When cash payments or withdrawals count more than Rs 1 crore in a fiscal year, Section 194N requires the payer to deduct TDS. TDS would be Rs 50,000 at 2%, or Rs 1,000, in the above example. The tax deduction limit is dropped to Rs 20 lakh if the person receiving the money has not yet submitted an income tax return in the three years before the year. TDS will be debited at:

-2% on cash withdrawals and payments up to Rs 1 crore and over Rs 20 lakh.
-5% for withdrawals over Rs 1 crore.

Calculation of Threshold Limit

When a person receives cash payments from their bank account for more than Rs 1 crore, the payer has to deduct tax.

A bank or post office account, not the taxpayer's, is subject to Rs 1 crore limit in a fiscal year. Put differently, not at the PAN level, but at the financial institution or post office level.
No TDS is applied when a person with three bank accounts at three different banks takes out Rs 1 crore * 3 banks, or Rs 3 crore.
Any taxpayer who takes money from the bank account or accounts (current or savings, etc.) that the recipient retains will only apply to TDS under Section 194N. For example, the bank should deduct TDS if it pays its account holder (i.e., any taxpayer) more than Rs 1 crore in cash during a ﬁnancial year from the taxpayer's account.
The recipient of the finances is not the authorised user but a third party if the taxpayer sends a bearer cheque for more than Rs 1 crore to a third party during a fiscal year. Under such circumstances, the bank does not pay the account holder. It's unclear from the preconceived ideas whether a bearer cheque given to a third party (such as a vendor) to obtain money from the bank will fall under section 194N. Is the bank required to carry taxes from the account holder's payment for the bearer verification sent to a third party?
In addition, section 40(A)(3) of the Income Tax Act forbids business payments made with bearer cheques from being stated as expenses. Payments over Rs 10,000 per day, in one transaction or total, are not permitted as business costs.
For payments made on or after September 1, 2019, Section 194N will be applicable. However, the cash payments and withdrawals made during FY 2019–20 are liable to a limit of Rs 1 crore.

Latest Budget Updates

Budget 2023: The yearly cutoff for cash withdrawals from cooperative societies has raised to ₹ 3 crores.

Budget 2020: For taxpayers who have not filed their income tax returns in the previous three years, the limit for TDS under Section 194N has been lowered to Rs 20 lakh.

If the taxpayer withdraws more than Rs 20 lakh in cash during the fiscal year, TDS is withheld at the appropriate rates.

Illustrations

Illustration 1: The following withdrawals were made by Mr. A in the fiscal year 2023–2024. The deadline for reporting his ITR for the fiscal years 2020–21, 2021–22, and 2022–23 has passed, and he has yet to do so.

Date	Withdrawal amount	Aggregate amount withdrawn up to the date given	Rate	Computation	Tax to be deducted
01/04/2023	Rs. 14 lakh	Rs. 14 lakh	–	–	–
21/07/2023	Rs. 26 lakh	Rs. 40 lakh	2%	(Rs. 40 lakh - Rs. 20 lakhs) x 2%	Rs. 40,000
25/08/2023	Rs. 35 lakh	Rs. 75 lakh	2%	Rs. 35 lakh x 2%	Rs. 70,000
04/09/2023	Rs. 35 lakh	Rs. 1.10 crore	2% and 5%	(Rs. 25 lakh x 2%) + (Rs. 10 lakh x 5%)	Rs. 1,00,000
18/10/2023	Rs. 50 lakh	Rs. 1.6 crore	5%	Rs. 50 lakh x 5%	Rs. 2,50,000

According to section 194N, withdrawals from all of the accounts held with the same bank will be taken into consideration collectively when calculating the withdrawal limit.

Illustration 2: Mr. A has current and savings accounts with XYZ bank. These are the trades he made in FY 2023–2024:

Date of cash withdrawal	Withdrawal from the savings account	Withdrawal from the current account
01/06/2023	Rs. 5,00,000	Rs. 15,00,000
15/07/2023	Rs. 1,00,000	Rs. 15,00,000
30/7/2023	Rs. 2,00,000	Rs. 20,00,000
01/10/2023	Rs. 50,000	Rs. 40,00,000
01/11/2023	Rs. 1,50,000	Rs. 10,00,000
Total	Rs. 10,00,000	Rs. 1,00,00,000
Tax to be deducted	Rs. 20,000 (10,00,000+1,00,00,000-1,00,00,000)*2%

The tax deduction limit will depend on the individual banks if there are several bank accounts with several banks.

Illustration 3: Throughout the fiscal year, Mr. A took out cash from the following banks:

Bank	Total cash withdrawn during the FY 2023-24
Axis Bank	Rs. 60 lakh
SBI Bank	Rs. 50 lakh
ICICI Bank	Rs. 10 lakh

Since none of the banks in the aforementioned scenario have reached the Rs 1 crore limit, no bank is obligated to deduct TDS under Section 194N. However, SBI Bank is required to withhold TDS at a rate of 2% or 5%, depending on the circumstances, if Mr. A withdraws more than Rs 1 crore from the bank.

Conclusion

In summary, the government's goal of a cashless society is in line with Section 194N of the Income Tax Act: TDS on cash withdrawal, which is a key tool for discouraging cash transactions and encouraging digital payments. This clause, which levies TDS on cash withdrawals over predetermined limits, promotes more efficient transaction practises among taxpayers while simultaneously increasing financial transparency. For people and organisations to successfully manage their tax responsibilities, it is essential to comprehend the applicability, exemptions, and TDS rates under Section 194N.

FAQ

Q1. What is Section 194N?

According to Section 194N of the Act, if cash transactions in a given fiscal year count more than ₹ 20 lakh (if no ITR has filed for all three prior AYs) or ₹ 1 crore (if ITRs filed for all or any one of the three prior AYs), tax is withdrawn.

Q2. From when has TDS on cash withdrawal u/s 194N been made applicable?

The Income Tax Act's Section 194N on TDS on withdrawing cash takes effect on September 1, 2019, or FY 2019–2020.

Q3. Why was Section 194N introduced?

In Budget 2019, the government implemented section 194N to hinder cash transactions and encourage the digital India initiative. This section mandates that all credit unions and other institutions withhold TDS at adequate TDS rates from the transaction value at the time of payout.

Q4. Is 194N applicable for NRI?

Cash withdrawals by residents and non-residents are subject to Section 194N.

Q5. Is 194N applicable to trust?

Except for a few expressly stated exceptions, Section 194N relates to all, including charitable organisations, AOPs, clubs, trusts, etc.

Q6. X has withdrawn Rs. 1cr in cash; Will TDS u/s 194N be deducted in this case?

No, TDS won't be withheld in this example because the total cash removal does not exceed Rs. 1cr. But if ABC hasn't issued an ITR in the last three years, TDS must be deferred at a rate of 2% on up to Rs. 1 crore.

Q7. Is TDS deductible if cash is withdrawn from the post office?

Indeed, TDS will be withheld if more than Rs. 1 crore in cash is taken out of the post office during a fiscal year.

Q8. Can we claim a refund of TDS Deducted u/s 194N?

Yes, you can get the TDS that was excluded under section 194N refunded from your overall income tax liability. In order to be eligible for a refund, your annual income must not exceed the basic exemption limit. Additionally, if you wish to claim a TDS rebate under section 194N, you must file an ITR.

Q9. What if taxpayers have multiple bank accounts?

A taxpayer's TDS deduction under Section 194N is applied collectively across all their bank accounts if they have more than one. Accordingly, withdrawals from multiple bank accounts amount to ascertain whether they surpass the ₹1 crore mark in a given fiscal year. TDS will be deducted from the excess amount if the total cash withdrawals from these accounts exceed ₹1 crore. When calculating TDS based on the total amount withdrawn across all accounts, each bank must ensure compliance even though they monitor withdrawals individually.

Q10. How can I claim a refund of TDS deducted under Section 194N?

You must file an income tax return (ITR) to submit a refund of TDS deferred under Section 194N or to have it deducted from your overall income tax obligation. This process applies if you can get a refund of the amount withdrawn because your yearly income does not exceed the basic exemption limit. For the excess TDS to be adjusted based on your overall income tax liability, you must file an ITR to claim this refund. You can get a refund or deduct the TDS from any taxes you owe by completing this registration process.

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