Section 194N – TDS on Cash Withdrawals: Promoting a Less-Cash Economy

Section 194N of the Income Tax Act mandates Tax Deducted at Source (TDS) on cash withdrawals exceeding a certain limit from bank accounts, co-operative banks, or post office accounts. The primary objective is to discourage large cash transactions and promote a less-cash economy.

The threshold for TDS under Section 194N is generally ₹1 crore in a financial year. However, for individuals who have not filed their income tax returns (ITR) for all three assessment years relevant to the three previous years, the threshold is lower, at ₹20 lakh.

The TDS rates vary:

• 2% on cash withdrawals exceeding ₹1 crore in a financial year, if the recipient has filed ITR for all three preceding assessment years.
• 2% on cash withdrawals exceeding ₹20 lakh but up to ₹1 crore in a financial year, if the recipient has NOT filed ITR for all three preceding assessment years.
• 5% on cash withdrawals exceeding ₹1 crore in a financial year, if the recipient has NOT filed ITR for all three preceding assessment years.

Banks, co-operative banks, and post offices are responsible for deducting TDS under Section 194N when a person withdraws cash exceeding the specified limits from their accounts.

Yes, Section 194N applies to cash withdrawals from all types of accounts including savings accounts, current accounts, and overdraft accounts held with banks, co-operative banks, and post offices.

Yes, certain entities are exempt from TDS under Section 194N. These include:

• The Central or State Government
• Any bank (including a co-operative bank)
• Any banking company or co-operative society engaged in carrying on the business of banking
• Any white label ATM operator
• Such other person or class of persons as the Central Government may, by notification in the Official Gazette, specify in consultation with the Reserve Bank of India.

The cash withdrawal limit is calculated on an aggregate basis across all accounts held by a single person with a particular bank/post office during a financial year. If you have multiple accounts with the same bank, the withdrawals from all those accounts will be clubbed to check the threshold.

The threshold of ₹1 crore (or ₹20 lakh/₹1 crore for non-filers) applies per financial year per bank/post office. So, if you withdraw ₹80 lakh from one bank and ₹80 lakh from another, neither bank will deduct TDS, as your withdrawal from each bank is below the individual bank threshold.

Banks are required to check the ITR filing status of their customers through an automated system. Based on this, they apply the appropriate TDS rate. It is crucial to ensure your ITRs are filed on time to avoid higher TDS.

TDS deducted under Section 194N can be claimed as a credit when you file your income tax return. If your total tax liability is less than the TDS deducted, you may be eligible for a refund.

Section 194N significantly impacts businesses that primarily operate using cash transactions, such as certain retail businesses, agricultural traders, etc. It encourages them to shift towards digital payment methods and formal banking channels to avoid TDS.

The simplest way to avoid TDS under Section 194N is to limit cash withdrawals below the specified thresholds. Additionally, ensure you file your income tax returns regularly and on time, even if your income is below the taxable limit, to benefit from the lower TDS rate.

If you have genuine reasons for requiring large cash withdrawals, you will still be subject to TDS under Section 194N if the limits are exceeded. You can, however, claim this TDS as a credit while filing your ITR.

Section 194N was introduced in the Union Budget 2019 and became effective from September 1, 2019. Its primary purpose is to curb cash transactions, promote digital payments, and track large cash movements to curb black money and improve tax compliance.

You can find more official information about Section 194N on the website of the Income Tax Department, Government of India, or by referring to the relevant sections of the Income Tax Act, 1961, and associated circulars and notifications.