The Indian government has been trying to transform India into a digital economy. Digital India Campaign and Demonetisation are two of the popular initiatives that were taken to reduce the usage of physical money. Section 194N of the Income Tax Act was introduced to discourage cash payment and to promote digital transactions. 

 

Additionally, it will help the government keep track of the cash flow. It deals with the Tax Deducted at Source (TDS) on cash withdrawals during a particular financial year. 

Who Must Deduct TDS u/s 194N

The following entities can deduct TDS under Section 194N:

  • Public banks

  • Private banks

  • Post offices

  • Co-operative banks

 

The following entities have to pay this tax:

  • Individuals

  • Hindu Undivided Family (HUFs)

  • Companies

  • Local Authorities

  • Limited Liability Partnership or Partnership Firms

  • Body of Individuals (BOIs)

  • Association of Persons (AOPs)

Calculation of Threshold Limit

The threshold limit is calculated in the following manner:

  • Tax can be deducted by the payer when paying an individual in cash for amounts exceeding ₹1 Crore from the individual's bank/post office account

  • Any cash withdrawals made by an individual from the bank accounts maintained by such a recipient only attract tax under this section

  • If an individual issues a bearer cheque exceeding ₹1 Crore to a third party who is not the account holder, the bank won't honour the payment

  • In the case of payments for business, payments that are made via bearer cheques will not be allowed as an expenditure u/s 40(A)(3)

  • Any payment that exceeds ₹10,000/day (either in aggregate or in a single transaction) is not allowed as a business expenditure

Advantages of TDS Deduction Under Section 194N

The advantages of tax deduction under Sec 194N of the Income Tax Act are:

  • The Income Tax Department accesses bulk cash transaction data for easier investigation in case of discrepancies

  • Due to TDS liabilities on cash withdrawals, people prefer digital transactions over traditional methods

  • This section promotes digital transactions with a good automation system

Exceptions Under Section 194N of the Income Tax Act

Tax deducted at source is not applicable under this section for the withdrawals made by the entities mentioned below:

  • Any banking company (public or private sector)

  • Government (State or Central)

  • Co-operative banks

  • Post offices

  • Individuals notified by the government in consultation with the RBI

  • Bank business correspondents 

  • RBI-licensed sub-agents, dealers, full-fledged money changers, or franchise agents

  • Operators of ATMs of any Cash Replenishment Agency (CRA) or bank

  • Traders or commission agents operating under the Agriculture Produce Market Committee (APMC)

Rate of TDS U/S 194N

The payer has to deduct TDS at a 2% rate on cash withdrawals/payments of more than ₹1 Crore in a particular fiscal year u/s 194N of the Income Tax Act.

 

In case the individual receiving the cash payment has not filed an ITR in the last three years, this TDS limit is reduced to ₹20 Lakhs.

 

Tax deducted at source will be:

  • 2% on cash withdrawals/payments of more than ₹20 Lakhs and up to ₹1 Crore

  • 5% on withdrawals that exceed ₹1 Crore

Frequently Asked Questions

What is Section 194N of the Income Tax Act?

Section 194N governs TDS deduction on cash withdrawals exceeding ₹1 Crore in the financial year.

When can you deduct TDS under Section 194N?

As per Section 194N, TDS applies to cash withdrawals exceeding ₹20 Lakhs if no ITR has been filed for three previous assessment years. It also applies to withdrawals exceeding ₹1 Crore if the ITRs have been filed.

Can the payee apply for a lower tax deduction on cash withdrawals?

No. The payee cannot apply for a lower tax deduction using the Section 197 certificate.

What is the time limit to file ITR u/s 194N?

In case the entity who is withdrawing the cash has not filed income tax return for the past three years, a higher rate of TDS will be applied. For this, the due date is considered to be three years before the date of withdrawal. In case the income tax returns filing date under this section has not expired yet, it will not be applicable for the particular assessment year.

Who can claim TDS credit u/s 194N?

As per the Central Board of Direct Taxes, individuals can claim TDS credit for tax cash deposits deducted from their accounts during the fiscal year.

What are the prerequisites for availing deductions under Section 194N?

To avail of deductions u/s 194N, you need an active PAN/TAN and mobile number.

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