Section 194N – TDS Implications on cash withdrawal in excess of Rs 1 crore

Section 194N TDS 

Beginning with demonetization, the government has enacted new laws in the constitution to support the nation’s cashless economy. Section 194N, which was recently proposed in the constitution, is yet another step toward encouraging digital transfers and eliminating cash purchases. The portion focuses on the imposition of TDS on cash withdrawals that meet such thresholds.

Section 194N – Income tax Objective

The segment serves the aim of eradicating big cash withdrawals from bank accounts and eradicating black money in India. A thorough examination of the section is listed below to give you an understanding of its features.

Section 194N was adopted by the government in the Union Budget 2019 presented on July 5, 2019. To deter cash transactions in the country and foster the digital economy, the Finance Bill, 2019, included ‘Section 194N – TDS on cash withdrawals exceeding Rs 1 crore.’

Deduction of TDS under Section 194N

Section 194N requires the individual (payer) making the cash transfer to subtract TDS. Here is a list of those people:

• Bank (private or public sector)
• co-operative bank
• post office

Such groups of people (payees) are exempt from the provisions of this section. They are as follows:

• Any federal agency
• Any kind of bank, including cooperative banks
• Any banking company’s corporate correspondent (including co-operative banks)
• Any bank’s white label ATM operator (including co-operative banks)
• Any other citizen who has been informed by the government

What is the aim of TDS in Section 194N?

TDS will be withheld by the payer after making cash payments to the payee in excess of Rs 1 crore in a fiscal year. If the payee withdraws money at regular intervals, the payer must subtract TDS from the balance if the cumulative amount withdrawn reaches Rs 1 crore in a fiscal year. TDS will also be levied for amounts above Rs 1 lakh. For example, if an individual withdraws Rs 99 lakh in total during the fiscal year and then withdraws Rs 1,50,000, the TDS liability is only on the excess sum of Rs 50,000.

TDS Rate under Section 194N

Section 194N requires the payer to subtract TDS at a rate of 2% on cash payments/withdrawals of more than Rs 1 crore in a fiscal year. Thus, in the preceding case, TDS will be levied on Rs 50,000 at a rate of 2%, i.e. Rs 1,000. If the person earning the money has not filed an income tax return in the three years preceding the year, the TDS is 2% on cash payments/withdrawals of more than Rs 20 lakh and up to Rs 1 crore, and 5% on withdrawals exceeding Rs 1 crore.

Latest Changes in Section 194N

The following amendments to Section 194N from the Fiscal Year 2020-21 will be effective on July 1, 2020:

• If the assessee has not filed an income tax return for the preceding three fiscal years, TDS will be deducted at the rate of 2% on amounts withheld ranging from INR 20 lakh to INR 1 crore, and 5% on amounts above INR 1 crore for the fiscal year.
• If the assessee has filed an income tax return for the current year, there is no TDS deduction applicable; however, there is a 2% TDS deduction on amounts of one crore.

Certain provisions must be met in order to claim a reduced TDS deduction under Section 194N:

• According to Section 139, the return must be submitted within the time limit stated, along with the income tax returns (1).
• Recently registered firms are not eligible to get a reduced deduction because of blank previous filing records.
• In order to file income tax returns for the previous three fiscal years, the banker/cooperative society must have a statement stating the business of the banking/post office.

Section 194N – FAQs

Q1. When does section 194N not apply?

Section 194N requirements are not valid where payment is made to the following person:

• Government banking company Cooperative society engaged in banking Every business correspondent approved by the RBI
• Any approved white label automated teller machine operator provided by the RBI
• Any other individual specified by the central government in the notification

Q2. Who requires deducting TDS u/s 194 N?

The following individuals are responsible for deducting TDS:

• A financial institution (whether public or private)
• A cooperative society engaged in the banking industry.
• A postal service

Q3. When is TDS expected to be deducted and what is the rate of TDS u/s 194N?

TDS may be withheld at the rate of two (2) percent on cash withdrawals over Rs. 1 lakh, according to section 194 N of the Income Tax Act.

TDS will be withdrawn when a payment is received by a bank, cooperative association, or post office, i.e. TDS will be deducted when the payment is made.

Q4. What was the rationale for enacting Section 194N?

The ‘Digital India’ program is one of the NDA government’s main initiatives. Section 194N was adopted in Budget 2019 to promote this and pave the way for a cashless economy. A 2% TDS levy on cash withdrawals above Rs 1 crore in a fiscal year would encourage further digital payments. Contributing to the government’s digital India initiative.

Q5. Is TDS deductible after withdrawing cash from the post office?

Yes, TDS will be withheld if you withdraw more than Rs. 1 crore from the post office in a fiscal year. TDS will be withheld in the fiscal year 2019-20 if a balance above Rs 1 crore is removed from a post office account after September 1, 2019.