The Finance Act 2020 has extended the scope of the section to include persons who have not filed their Income tax returns for immediate preceding 3 Assessment Years.
1. What is Section 194N TDS on cash withdrawal?
The ambitious mission of the government of India is to drive India towards a cashless economy was boosted with the announcement of demonetization on November 8, 2016. Since then, the Government of India has taken numerous initiatives to promote cashless transactions. To promote digital payments further, and discourage the practice of making business payments in cash, a new section TDS Section 194N has been inserted to levy TDS on cash withdrawal exceeding Rs 1 crore.
This section has been inserted to discourage large amount of cash withdrawals from bank accounts and to curb the generation of black money in India. The detailed analysis of the provision has been given in the below.
Table of Content:
Extract of Section 194N
Finance Bill (No. 2), 2019 dated 5th July 2019
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 2% of a 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 a 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 authorization issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007;
(v) such other persons or class of persons, which the Central Government may, by notification in the Official Gazette, specify in consultation with the Reserve Bank of India.'.
2. What is the rate of TDS deduction under section 194N?
TDS at the rate of 2% would be deducted by banking companies, cooperative societies engaged in the business of banking, or post office, “if the cumulative withdrawals by a recipient from all accounts with one bank, exceeds INR 1 crore”.
3. Applicability and Threshold Limit under TDS Section 194N
This section will be applicable to any person (referred as Recipient) who withdraws a sum of, or an aggregate of sums, that is in excess of Rs. 1 Crore from all of his accounts maintained under one bank or such other institution as given above, in cash, in a particular previous year. It should be further noted that the account from which the cash is withdrawn must be in the name of the recipient only. (i.e. the account holder and the recipient must be the same).
Applicability of Rs. 1 crore limit
• The limit of Rs. 1 Crore is applicable for all types of accounts maintained by the bank or similar entities as mentioned above. For instance, if a recipient has a Current Account as well as an Overdraft Account with the same bank, the limit of Rs. 1 Crore will be applicable for aggregate withdrawals from both the accounts.
• Furthermore, if the recipient has branches throughout the country and maintains separate accounts for each branch, the limit is applicable in aggregate for all such different branches of the same bank.
• Therefore, there exists a loophole that a recipient can maintain accounts in different banks and withdraw in excess of Rs. 1 Crore from different bank accounts and avoid the applicability of the said provision.
4. Recent Amendments under TDS Section 194N:
The sole of the section has been increased in the Finance Act 2020.
Changes in case of Non-filing of Income Tax Return (Effective from 1st July, 2020)
• In case a person has not filed the income tax return for preceding 3 financial years: TDS will be deducted at 2% on Rs.20 lakhs to 1 crore amount withdrawn and 5% on the amount exceeding Rs.1 crore during the financial year
• If a person has filed the income tax return for preceding 3 financial years, TDS shall be deducted at 2% on the amount exceeding Rs.1 crore during the financial year
5. Example of TDS on cash withdrawal:
a) Mr. A has an account with State bank of India. He has already withdrawn Rs. 99,50,000/- during the year. He further withdraws Rs. 2,00,000/- during march then TDS will only be deducted on Rs. 1,50,000/- which is in excess of Rs. 1 Crore. Net payment to the recipient will be Rs. 1,97,000/-.
b) Mr. A has an account with State bank of India. He has already withdrawn Rs. 1,00,00,000/- during the year. He issued a bearer cheque in the name of Mr. B of Rs. 5,00,000/- payable in cash. Here 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.
6. Who is liable to deduct tax under Section 194N?
• Banking Company (To which the Banking Regulation Act of 1949 must be applicable, or any bank/banking institution referred to in Section 51 of the same Act.)
• Co-operative Society; that engages in carrying out the business of banking.
• Post Office
7. Exemption under TDS Section 194N
This section will not be applicable if recipient are following persons:
a) the Government;
b) any banking company or co-operative society engaged in carrying on the business of banking or a post office;
c) 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;
d) 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;
e) 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
f) Cash Replenishment Agencies (Refer Notification 68/2019).
g) Commission Agent or Trader of Agriculture Produce Market Committee (APMC) who has withdrawn cash over above of Rs. 1 crore for payment to farmers for Purchase of Agricultural produce (Refer Notification 70/2019).
h) Authorized Dealers and Full Fledged Money Changer (Refer Notification 80/2019)
8. Implementation Difficulties
The ground level difficulties in the implementation of this section will be as follows: -
• The specified class of deductor's as referred are required to incorporate a robust system of maintaining a log of each and every cash withdrawal by the recipient from his different accounts, to ensure that when his further withdrawals exceed Rs. 1 Crore, TDS is automatically deducted from such cash payment.
• Another problem which will be faced by the Bank's only and will be hard to tackle is that, in case of withdrawals from Automated Teller Machines (ATM's) in excess of aggregate limit of Rs. 1 crore, the amount of TDS need to be deducted, on such cash withdrawal above the specified limit has to be accurately calculated by the ATM machine itself and only the net proceeds should be handed over to the recipient.
9. Benefits of this section
• Huge cash withdrawals and cash payments will be discouraged with the insertion of this section.
• Digital payments will be promoted among the recipients to avoid TDS liability.
• Tax departments will be able to trace assesses with huge cash withdrawals during any previous year and can accordingly further investigate into the matter regarding disbursement of such huge cash .
• Violations of various limited cash payment laws under various Acts will get pushed with this new section.
• Hawala transactions will also get restrained as huge cash withdrawals from banks and other institutions will lead the recipient to face TDS liability as well as tax authorities and other concerned departments will be able to trace such recipients easily.
10. Hindrance
The only hindrance that will be faced by the department in the implementation and execution of this provision is a proper automated system that needs to be installed by the banks and other institutions. Specially in case of ATM machines, the execution of this provision will be a bit challenging for the department as well as banks.
Furthermore, with a proper automated system, this provision will lead to promotion of digital payments and avoid huge unauthorized cash transactions in the economy.
11. Important CBDT Notification for TDS Section 194N:
Queries were received from the general public on the applicability of section 194N on withdrawal of cash from 01.04.2019 to 31.08.2019. CBDT clarified that "this section shall be effective from 01st Sept. 2019 however, since the threshold limit of Rs. 1 Crore is with respect of the previous year, calculation of the amount of cash withdrawal for triggering deduction shall be counted from 1st April, 2019."
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