The budget 2020 has reduced the threshold limit for TDS to Rs 20 lakh for taxpayers who have not filed their income tax returns for the past three years. Such taxpayers withdrawing cash above Rs 20 lakh have to pay 2% as TDS.

Earlier, the Union Budget 2019 has introduced Section 194N for tax deduction at source (TDS) on cash withdrawals exceeding Rs 1 crore to discourage cash payments.

Let’s discuss Section 194N in detail:

What is Section 194N?

Section 194N is applicable in cash withdrawals of more than Rs 1 crore during a financial year. This section will apply to all the sums of money or aggregate sums withdrawn from a particular payer in a financial year. The section will apply to withdrawals made by any taxpayer, including:

1. An Individual
2. A Hindu Undivided Family (HUF)
3. A Company
4. A partnership firm or an LLP
5. A local authority
6. An Association of Person (AOPs) or Body of Individuals (BOIs)
7. Any bank (private or public sector)
8. A co-operative bank
9. A post office

The payer will deduct the tax while making payment to any individual in cash from a taxpayer’s bank account on the amount above Rs 1 crore. The limit of Rs 1 crore in a financial year is with respect to per bank or post office account and not a taxpayer’s account.

For example, a person with three bank accounts with three different banks can withdraw cash of Rs 1 crore * 3 = Rs 3 crores without any TDS. The cash withdrawal made by any taxpayer from the bank accounts maintained by such recipients will only attract TDS under Section 194N.

For instance, if a bank makes a cash payment of more than Rs 1 crore in an FY to its account holder (i.e. any taxpayer) from the account maintained by such taxpayer, then the bank will have to deduct TDS.

In the case of a payment made by a taxpayer through a bearer cheque issued to a third party, over Rs 1 crore in a financial year, the recipient of the cash is not the account holder but a third party. In such a case, the payment is not made by the bank to the account holder. In the above situation, there is an ambiguity that whether such bearer cheque given to any person (like vendor) to collect payment from the bank will be covered under section 194N? Whether the bank is liable to deduct tax on the account holder's funds in respect of the bearer cheque issued to a third party.

Separately, in the case of business payments, payment made through a bearer cheque would not be allowed as an expenditure under section 40(A)(3) of the income tax act. Any payment made exceeding Rs 10,000 per day (in a single transaction or in aggregate) is not allowed as business expenditure.

The limit of Rs 1 crore will be applicable to the cash payments/withdrawals made during FY 2019-20. The provisions of Section 194N will be applied to the payments made on or after 1 September 2019.

Why is Section 194N introduced?

The government has introduced Section 194N in the Union Budget 2019 proposed on 5 July 2019. To discourage cash transactions in the country and promote the digital economy, ‘Section 194N – TDS on cash withdrawals over and above Rs 1 crore’ has been introduced through the Finance Bill, 2019.

Who will deduct TDS under Section 194N?

The person (payer) making the cash payment will have to deduct TDS under Section 194N. Here is the list of such persons:

1. Any bank (private or public sector)
2. A co-operative bank
3. A post office

There are specific categories of persons (payee) to whom the provision of this section will not apply. They are listed below:

1. Any government body
2. Any bank, including co-operative banks
3. Any business correspondent of a banking company (including co-operative banks)
4. Any white label ATM operator of any bank (including co-operative banks)
5. Any other person notified by the government

What is the point of TDS under Section 194N?

The payer will deduct TDS while making the cash payment over and above Rs 1 crore in a financial year to the payee. If the payee withdraws a sum of money at regular intervals, the payer will have to deduct TDS from the amount once the total sum is withdrawn exceeds Rs 1 crore in a financial year.

Further, the TDS will be done on the amount exceeding Rs 1 crore. For example, if a person withdraws Rs 99 lakh in the aggregate in the financial year and in the next withdrawal, an amount of Rs 1,50,000 is withdrawn, the TDS liability is only on the excess amount of Rs 50,000.

Rate of TDS under Section 194N

The payer will have to deduct TDS at the rate of 2% on the cash payments/withdrawals of more than Rs 1 crore in a financial year under Section 194N. Thus, in the above example, TDS would be on Rs 50,000 at 2%, i.e. Rs 1,000.

If the individual receiving the money has not filed an income tax return for three years immediately preceding the year, then the tax deduction limit is Rs 20 lakh. The TDS is 2% on the cash payments/withdrawals of more than Rs 20 lakh and up to Rs 1 crore, and 5% for withdrawal exceeding Rs 1 crore.

Note: 

The recipient of cash cannot furnish form No. 15G/15H to the bank and cannot apply for a lower deduction certificate u/s 197 and

While calculating three years immediately preceding the years, if the date of return u/s 139(1) has not expired, then that assessment year is not to be considered.

For example:

Mr Raj has made the following withdrawals during the financial year 2020-21. He has not filed his return of income for the financial year-2017-18, 2018- 19, 2019-20 and that the due date for filing of return is expired.

Section 194N applies when an amount is withdrawn from one or more accounts maintained with the same bank.

Mr Raj maintains a savings and current account with XYZ bank. His transactions during the FY 2020-21 are as follows:

 If there are multiple bank accounts, the tax deduction limit shall be based on the individual banks.

For example:

Mr Raj has withdrawn cash from the following banks during the financial year–

In the above example, No bank is required to deduct TDS under section 194N as the limit of Rs 1 crore is not exhausted in any of the banks.

However, if Mr Raj withdraws cash of more than Rs 1 crore from SBI bank, then SBI bank is liable to deduct TDS at two per cent or five per cent, as the case may be.

For more information on this visit www.taxaj.com.