TDS on cash withdrawal – Section 194N

Finance Minister Nirmala Sitharaman presented the union budget on 5 July 2019 that included several benefits under 80EEA and 80EEB for the individuals to encourage the habit of investing in real estate and purchase of electric vehicles. 

Similarly, she introduced Section 194N to encourage the habit of making payments digitally and discourage cash payments in India. Under this section, TDS would be charged on the withdrawal of cash exceeding a limit of Rs 1 crore.

Want to know more about Section 194N? This article will provide you all the important information regarding it.

What is the Purpose and applicability of Section 194N? 

Applicability: 

Section 194N introduced with union budget 2019 implies on withdrawal of cash exceeding the limit of Rs 1 crore in a financial year. It applies to all the money withdrawn by a payer in a particular financial year.

The section applies to the taxpayer, including:

  • Any individual
  • HUFs or Hindu Undivided Family
  • Local authorities
  • A company
  • Limited liability partnership as well as a partnership firm
  • AOPs OR Association of person
  • BOIs or Body of Individuals

Whereas below-given payers are covered under the section 194N

  • A bank whether it’s a private or a public sector bank
  • Co-operative banks
  • Post offices

The tax would be deducted while making payments in cash from the taxpayer’s bank account if the amount is more than Rs 1 crore. Moreover, the tax-deductible limit applies per account, which means if a person has four bank accounts, he can easily withdraw Rs 1 crore*4= Rs 4 crore cash without any deduction of TDS on his money.

TDS applicability on the limit of Rs 1 crore would be applicable during the financial year 2019-20. Section 194N provisions will apply to the payments made onwards or after 1 September 2019. 

Purpose: 

Section 194N was introduced with a purpose to promote the digital economy and discourage cash payments within the citizens of India.

Who can deduct the TDS under the provisions of Section 194N? 

An individual making cash payments has to deduct TDS as per the provisions of Section 194N. Following is the list of all those individuals:

  • Private or public bank
  • Co-operative bank
  • Post office

Whereas there are certain payees on which provisions of section 194N is not applicable, such as:

  • Any type of government bodies
  • Any bank including the co-operative banks
  • Business correspondent of any banking company including the co-operative banks
  • All the white label ATM operators of any type of bank, including the co-operative banks.
  • Any other individual notified by the respective government.

Rate of TDS deducted under section 194N:

As per the section 194N, the taxpayer can deduct TDS at the rate of 2% applicable on the cash withdrawal/payments more than Rs 1 crore from the financial year 2019-20. For e.g. TDS applicable on Rs 10,000 at 2% is Rs 2,000.

Important points regarding Section 194N: 

  • Section 194N applies to the cash payments over Rs 1 crore from 1 April of the previous year to the 31 March of the upcoming year.
  • Banks and other similar entities basically precede their payments in cash instead of paying it through cheques. The particular account holder issues cheques. Therefore, the cheque of the bank does not fall under the definition of cash, as mentioned in the section. So, TDS won’t be applicable to such conditions. 
  • The banks and other similar entities need to keep and maintain the record all the cash payments above the limit of Rs 1 crore in the previous financial year.
  • The limit of TDS applicability i.e., Rs 1 crore, applies on every account maintained by a bank or other similar entities.
  • As far as the account holder and the receipt are not the same, and payment through cash is from bearer cheques, TDS won’t be deducted in such a situation.
  • Some cases are exempted from the provisions of section 194N that includes payments made to banks, government, co-operative societies, and post offices. Therefore, payments made to these entities are not applicable for TDS deduction, irrespective of the cash withdrawn from them.

So, it can be said that the Indian government is taking several measures to promote digital payments, and Section 194N would be one of those strong measures which came into action from the 1 September 2019. 

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