Introduction & Applicability of TDS Section 194N on Cash Withdrawal

Introduction of TDS Section 194N

Keeping in mind the blueprint of the cashless economy, the BJP-led government is frequently introducing reforms in the laws to achieve the goal. Starting with demonetization, the government has come up with new laws in the constitution which fulfil the purpose of the cashless economy in the nation. Section 194N recently invited in the constitution is yet another move towards promoting digital payments and eradicating cash transactions. The section concentrates on imposing TDS on cash withdrawals exceeding certain threshold limits.

Latest Update in Section 194N Under TDS

• In the Budget 2023, the annual cash withdrawal limit for co-operative societies has been raised to INR 3 crores.

The Objective of Section 194N Under TDS

The section serves the objective of eliminating large cash withdrawals from bank accounts and phasing out black money from India. Mentioned below is the detailed scrutiny of the section to give you an idea of its functionality.

Changes in Section 194N Under TDS

The changes are done in section 194N from the FY 2020-21 to be applicable from 1st July 2020:

• If the assessee hasn’t filed the income tax return for the previous 3 financial years the TDS rate will be deducted at the rate of 2% on the amount between INR 20 lakh to 1 crore withdrawn while 5% applicable on the amount exceeding the INR 1 crore of the FY.
• If the assessee has filed the income tax return for the given year, there is no TDS deduction applicable however there will be a 2% TDS deduction on the amount above 1 crore.

Certain conditions for reduced TDS deduction under section 194N:

• The return must be filed within the specified time period along with the income tax returns as per section 139(1).
• Recently registered organizations may not be eligible to get the reduced deduction due to the blank previous filing records.
• There must be a declaration provided to the banker/co-operative society which must state the business of banking/post office in order to file the income tax returns of the past 3 FY.

Description – Finance Bill (No. 2), 2019 Dated 5th July 2019

Applicable to an entity who is responsible for paying a sum or aggregate of the sums in cash exceeding Rs. 1 Crore to any individual (recipient) during the previous year. The entity shall deduct the amount equal to 2% of the total sum from the recipient’s authorized account as income tax.

‘The Entity’ may be:

• A banking company which comes under the Banking Regulation Act, 1949 (includes bank or any other financial institution referred to in section 51 of the act)
• A co-operative society indulged in banking processes
• A post office

Recommended: A Brief Study of Newly Added TDS Section 194M

The sub-section of the law shall not apply to payment made to:

• The Government
• A bank or co-operative society engaged in the business of banking or a post office.
• An entity related to a banking company or co-operative society which is indulged in the business of banking, working in accordance with the guidelines set by the Reserve Bank of India under the Reserve Bank of India Act, 1934.
• Any automated teller machine operator or a banking company or co-operative society indulged in the business of banking working in accordance with the laws of RBI mentioned under the Payment and Settlement Systems Act, 2007.
• An individual or a group, the Central Government (by an official message in the Official Gazette), may appoint in consultation with the Reserve Bank of India.

Summary of Analysis TDS Section 194N

• This act will be effective from the 1st of September 2019.
• It will be applicable to any person (Recipient) who withdraws a total sum of money exceeding Rs. 1 Crore from all of his accounts maintained under one bank or any other institution mentioned in a previous year.

To Be Noted: The account from which the cash is withdrawn must be in the name of the Recipient. (i.e. the account holder and the recipient must be the same).

Instances of Applicability of Section 194N Under TDS:

Instance 1: An account holder in the State Bank of India has already withdrawn Rs. 99,50,000/- during the year. He further takes out Rs. 2,00,000/- during the month of March then TDS will be applicable only on Rs. 1,50,000 which is in excess of Rs. 1 Crore. Net payment to the recipient will be Rs. 1,97,000.

Instance 2: An account holder in State Bank of India has already withdrawn Rs. 1,00,00,000/- during the year. He issued a bearer cheque of Rs. 5,00,000/- in the name of his friend payable in cash. In such a case no TDS shall be deducted even if the amount of withdrawal exceeds Rs. 1 Crore as the account holder and the recipient are not the same.

All types of bank accounts maintained by the bank come under the criterion of Rs. 1 Crore.

For example, if the recipient holds a Current Account as well as an Overdraft Account with the same bank, then the limit is applied to the aggregate sum withdrawn from both accounts. Further, if the recipient holds an account in branches of the same bank available throughout the country thereon the limit is applicable on the aggregate sum withdrawn from different branches of the same bank.

Read Also: Complete Information on Section 194C for TDS on Payment to Contractors

If the recipient holds accounts in different banks and withdraws in excess of Rs. 1 Crore from different bank accounts the condition may skip the applicability of the provision.

Advantages of TDS Section-194N

• The section will block the way for huge cash withdrawals and transactions and digital payments will be promoted.
• Tax Department can easily access the data of huge cash transactions and further investigation into the matter related to huge cash transactions.
• The public will boycott the traditional ways of the transaction as the huge cash withdrawals will lead to TDS liabilities.
• The objective of digital payments may be achieved with a proper automated system at the same time blocking the way for huge cash transactions.

Challenges Related to the Execution

The only hurdles which may come in the path of implementation of this section will be: –

• The group of deductors needs to configure a robust system for each and every transaction from different accounts to identify whether the withdrawal exceeds Rs. 1 Crore. There has to be a mechanism for automatically deducting TDS from such transactions.
• Proper installation of the automated mechanism by banks or other financial institutions. Prominent is the case of ATM where the execution of this act is a bit difficult for the concerned department as well as banks. ATM needs a mechanism which automatically deducts TDS on transactions above Rs. 1 Crore.