Section 194N of Income Tax Act, 1961, was introduced to curb the excessive use of cash and promote transparency in financial transactions. This section applies to cash withdrawals from banks, post offices, and co-operative societies. The main aim is to encourage digital payments and prevent black money from circulating in the economy. It requires TDS (Tax Deducted at Source) on cash withdrawals exceeding certain limits. In this article, we will understand the key aspects of Section 194N.
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What is Section 194N?
Section 194N of Income Tax Act mandates the deduction of TDS on cash withdrawals. This applies when a person withdraws an amount exceeding a specified threshold. The institutions are required to deduct TDS when the amount withdrawn in cash exceeds the prescribed limit. These institutions responsible for making payments include:
Banking Companies regulated by the Banking Regulation Act.
Co-operative Societies involved in banking.
Post Offices making cash payments.
Who is Required to Deduct TDS?
The institutions will deduct TDS when cash withdrawals exceed the specified limits. The following entities are responsible for deducting TDS under this section:
Banks: Public and private sector banks, including co-operative banks.
Co-operative Societies: Engaged in banking activities.
Post Offices: Authorized to make cash payments.
Threshold Limits for TDS Deduction
Section 194N sets certain thresholds for when TDS applies. The limits differ depending on whether the person has filed income tax returns for the past few years.
General Threshold (For ITR Filers)
If the recipient of the payment has filed income tax returns (ITR) for the last three years, the TDS deduction will apply when the total cash withdrawal exceeds ₹1 crore during the financial year. The rate of TDS will be 2% on the amount exceeding ₹1 crore.
Threshold for Non-Filers of ITR
If the recipient has not filed income tax returns for the last three years, the threshold and TDS rate change:
If the cash withdrawal exceeds ₹20 lakh but is less than ₹1 crore, the TDS rate will be 2%.
If the cash withdrawal exceeds ₹1 crore, the TDS rate increases to 5%.
It is important to note that if a person fails to file their tax returns for the past three years, the TDS rate is higher.
Exemptions from Section 194N
Certain payments are exempt from TDS under Section 194N. These exemptions ensure that the provisions of Section 194N do not burden essential institutions like banks and the government. These include
Payments to the Government: No TDS is deducted when the payment is made to the government.
Payments to Banks or Co-operative Societies: Banks, co-operative societies, and post offices are exempt from this provision.
Business Correspondents: Business correspondents of banks, authorized under RBI guidelines, are exempt.
White Label ATM Operators: These are also exempt when the payment is made to a white label ATM operator.
How is TDS Calculated?
TDS is calculated on the amount exceeding the threshold. For instance, if a person withdraws ₹1.2 crore in a year, the amount exceeding ₹1 crore is ₹20 lakh. In this case, TDS will be 2% of ₹20 lakh, which is ₹40,000. This amount is deducted at the time of the withdrawal.
The TDS rate increases to 5% if the person has not filed income tax returns for the last three years and the withdrawal exceeds ₹1 crore.
When is TDS Deducted?
TDS is deducted at the time of cash withdrawal. For example, if a person withdraws ₹1.5 crore from a bank, the bank will deduct TDS of 2% on the amount exceeding ₹1 crore. This is done at the time of the withdrawal itself.
How to Avoid High TDS Deduction?
To avoid the higher TDS rate, individuals should file their income tax returns regularly. If they have filed their returns for the last three years, they can avoid the higher rate of 5% on withdrawals over ₹1 crore. It is important to maintain records of your tax filings and ensure compliance to enjoy the benefits of lower TDS rates.
Who Benefits from this Section?
This section primarily benefits the government, financial institutions, and the public. For the government, it helps curb the use of black money. It also helps in monitoring large cash transactions, which were previously difficult to trace. Financial institutions benefit by encouraging digital transactions over cash withdrawals.
The public benefits as well, as Section 194N promotes transparency and accountability. It also encourages people to file their income tax returns regularly.
Summing Up
The goal of Section 194N of Income Tax Act is to cut down on cash transactions and encourage people to use digital payments instead. The government wants to make the financial world more open by putting TDS on cash withdrawals over certain limits. It tells people that if they want to avoid high TDS rates, they should file their income tax returns on time. Though this section may seem burdensome for large cash withdrawers, it is an important step toward reducing unaccounted money in the economy. Taxpayers must ensure that they comply with the provisions of this section. By doing so, they can avoid unnecessary tax deductions and help in the growth of a digital and transparent financial ecosystem.
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FAQs on Section 194N of Income Tax Act
Q1. What is Section 194N of the Income Tax Act?
Section 194N requires deduction of TDS on cash withdrawals in excess of certain limits by individuals from banks, post offices, and co-operative societies.
Q2. What is the rate of TDS under Section 194N?
The TDS rate is 2% if withdrawal of cash exceeds ₹1 crore. If the recipient has failed to file income tax returns over the last three years, then the rate will be 5%.
Q3. What is the TDS withdrawal limit under Section 194N?
The TDS is applicable when cash withdrawals exceed ₹1 crore in the financial year in respect of those who have filed their ITR. In case of individuals not having filed ITR, the limit is ₹20 lakh.
Q4. Who are exempt from TDS under Section 194N?
The exemptions are the payments to the Government, banks, co-operative societies, post offices, business correspondents, and white-label ATM operators.
Q5. How is TDS calculated under Section 194N?
TDS is computed on the excess over the withdrawal limits prescribed. If a withdrawal of ₹1.2 crore is made, TDS of 2% is computed on the excess of ₹20 lakh over ₹1 crore.
Q6. When TDS is deducted under Section 194N?
The TDS is deducted upon cash withdrawal from bank, post office, or co-operative society.
