TDS on Cash Withdrawals in India - Section 194N

TDS on Cash Withdrawals in India - Section 194N

The Indian government has actively pursued initiatives to foster a cashless economy, with Section 194N of the Income Tax Act being a key player. Implemented in the 2019 Union Budget, this section mandates a tax deduction at source (TDS) on high-value cash withdrawals. Let's embark on a detailed exploration of Section 194N and its implications for individuals and financial institutions alike.

Objective of Section 194N

Section 194N has a clear two-pronged objective: to discourage large cash transactions and to curtail the circulation of black money within India. Black money refers to income earned through illegal means that escapes taxation. By incentivizing the use of digital payment methods, the government aims to create a more transparent financial system where every transaction is traceable and accountable. This, in turn, helps in curbing tax evasion and ensuring a fairer tax regime.

Who Deducts TDS under Section 194N?

The responsibility of deducting TDS under Section 194N falls on the entity making the cash payment, referred to as the payer. This includes:

• Banks (public and private sector)
• Cooperative banks
• Post offices

These institutions act as withholding agents, meaning they are obligated to deduct a specific amount of tax from the cash withdrawal before handing over the remaining sum to the payee.

Who is Exempt from TDS under Section 194N?

• Government agencies (central and state)
• Banks (including cooperative banks)
• Corporate correspondents of banks (including cooperative banks)
• White label ATM operators of banks (including cooperative banks)
• Any other entity specifically notified by the government

When is TDS Deducted under Section 194N?

The payer is required to deduct TDS when cash withdrawals made by an individual (payee) exceed a specific threshold in a financial year. This threshold amount has undergone some changes since the introduction of Section 194N.

• If the payee has filed income tax returns for any of the preceding three years, TDS applies only on cash withdrawals exceeding Rs. 1 crore in a financial year. The TDS rate is 2%.
• If the payee has not filed income tax returns for all three preceding years, TDS applies on withdrawals exceeding Rs. 20 lakh and up to Rs. 1 crore at a rate of 2%, and on withdrawals exceeding Rs. 1 crore at a rate of 5%.

Previously Applicable Threshold (Fiscal Year 2020-21):

Before July 1, 2020, the threshold for TDS deduction under Section 194N was simply Rs. 1 crore for all payees, irrespective of their income tax filing history.

Claiming Reduced TDS deduction under Section 194N

To avail the lower TDS rate of 2% (applicable to payees with income tax returns filed in the preceding three years), certain conditions must be met:

• The income tax returns must be filed within the stipulated due date as per Section 139(1) of the Income Tax Act.
• Newly registered businesses cannot claim the reduced deduction due to the absence of previous filing history.
• The payee may need to provide a statement from the bank/cooperative society/post office confirming the filing of income tax returns for the previous three years.

Section 194N Impact

Section 194N has undoubtedly nudged individuals towards digital transactions. By encouraging the use of debit cards, credit cards, and other digital payment methods, the government aims to create a more transparent financial system and reduce tax evasion.

Conclusion

Section 194N stands as a significant step towards India's goal of a cashless economy. While it may cause some inconvenience for those reliant on cash withdrawals, the long-term benefits for the nation's financial health are undeniable. By understanding the provisions of Section 194N, individuals can ensure compliance and avoid any unnecessary tax burdens.