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The Finance Ministry in order to discourage cash transactions and move towards less cash economy, it is proposed to insert a new section 194N in the Act to provide for levy of TDS at the rate of two per cent on cash payments in excess of one crore rupees in aggregate made during the year, by a banking company or cooperative bank or post office, to any person from an account maintained by the recipient.

Text of Section
Section 194N - Every person, being,

(i) a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act);

(ii) a co-operative society engaged in carrying on the business of banking; or

(iii) a post office,

who is responsible for paying any sum, or, as the case may be, aggregate of sums, in cash, in excess of one crore rupees during the previous year, to any person (herein referred to as the recipient) from an account maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent. of sum exceeding one crore rupees, as income-tax:
Provided that nothing contained in this sub-section shall apply to any payment made to,-

(i) the Government;

(ii) any banking company or co-operative society engaged in carrying on the business of banking or a post office;

(iii) any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of India under the Reserve Bank of India Act, 1934;

(iv) any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007;

(v) such other person or class of persons, which the Central Government may, by notification in the Official Gazette, specify in consultation with the Reserve Bank of India.

• This Section Came Into Force From 1 September 2019.

Deep Analysis of Section 194N

• It is Applicable to is binding on Banks, Coop Societies carrying on the business of banking or post office and such entities are responsible for paying in cash.

• It is Applicable to payments in cash in excess of Rs 1 crore during a previous year from 1st April to 31st March.

• It is applicable for all the Banks A/c from which the cash can be drawn. They can be Savings Account, Current A/c, Overdraft Account, Escrow account, cash credit account, debit card, credit card, ATM transaction linked to any account, and such cash drawals are mechanised, personalised, automated or otherwise in excess of Rs 1 crore.

For example If a Recipient have a Saving a/c and Cash Credit A/c with the Same Bank the Limit of 1crore will be applicable for Aggregate withdrawals from both the account. If the bank have various branches the limit is in aggregate for all branches of the same bank

• It is not Applicable to certain categories of payees including the Government,Banks, Coop Societies and post offices.But the Board should clarify what constitutes the Government who are included and who are excluded since there are several classes of authorities, designated offices, autonomies bodies, societies, Government sponsored schemes, boards, institutions, Government corporations run by the Government.

• It is not applicable in the case of an account holder requesting the bank to issue a bearer draft or bankers cheque which are cashable for cash at a different location or time.

For example if an Bank account holder say XYZ Ltd requests the bank to issue a pay order for Rs 100,000 and such sum is in excess of Rs 1 crore in that previous year, such sum is not liable for TDS since the bank is not paying any sum in cash. In other words, the bearer cheque of the bank does not fall in the definition of cash.

• TDS Is calculated as Suppose on 1st November 2019 Mr S has withdrawn Rs. 90,00,000/-.Now on 2nd January 2020 He withdraws another Rs. 20,00,000/-

In this case TDS is Applicable on Rs. 10,00,000 [i.e. Amount in excess of Rs. 1,00,00,000]

• It is clear from the provision that the TDS is applicable only if the aggregate of payments including this sum exceeds Rs 1 crore.

For example, the aggregate payments made till the last payment was Rs 99,90,000/- and the present payment is Rs 100,000. The aggregate payments so made crosses and reaches Rs 1,00,90,000/-. Now the matter for consideration whether the TDS is on Rs 90,000 or on Rs 100,000. From the language of the provision, it is applicable at 2% of Rs 90,000 = 1800 and the net payment to be made by a banker is Rs 100,000 minus Rs 1800 = 98200.

• The limit of Rs 1 crore is applicable for all transactions during the previous year. For the financial year 2019-20, for the period already expired till passing the Finance Bill and till 31-8-2019 may have to be ignored but as per the Provision it is applicable for all previous year

For example if a Person Withdrawal 99lakhs Cash on 1st August from SBI bank and again withdrawal 2lakhs on 30nd September the TDS is Applicable on Rs 1 lakhs (2% of 1lakhs).

• The above provision also says that the deduction is by way of income tax.

• TDS Deductions get posted to 26AS of Tax Payers.

• Issues as the Finance Minister used the word 'LEVY' OF TDS in her speech and in the Memorandum of Objects and Reasoning. Levy means is a tax, duty, surcharge or cess levied as a transaction cost and the same is not normally refundable. Levy is to impose and collect a tax, tariff, fine, etc., Whereas TDS is a deductible from certain payments being in the nature of income of the recipients and it takes the character of advance collection of taxes. The transactions of cash payments are already subjected to reporting in 3CD with reference to 40A(3) of the Income Tax act and the said expenditure is disallowable. If the TDS of 2% is treated as a levy as inferred from the language of the Honble Finance Minister, then 2% of such transactions will also become cost since it is not permissible for crediting the PAN of the account holder in 26AS.

• Contrary as the provision of section 198 clearly states that the tax deducted is income received. Therefore, the 2% amount withheld by the bank would then become income of the recipient.

There is no amendment in provision to section 198 where they could have stated that tax deducted and paid u/s 194N shall not be deemed to be the income received. But government itself is aware that such payments by the banks are not forming part of income of the recipient, and even then they have brought TDS provisions on such payments.

• Over all the Finance Department Has put up a nice step moving toward less cash economy and the digitalization is promoted.

Disclaimer: The above analysis is based on the personal views of the author and does not necessarily convey the views of the firm concerned.


Published by

Shrikant Toshniwal
Category Income Tax   Report

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