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 was introduced keeping this in mind and to promote digital payments.

What is Section 194N?

Section 194N deals with the Tax Deducted at Source (TDS) on cash withdrawals above ₹1 Crore during a particular financial year. This section applies to the aggregate of cash withdrawn from the bank in a fiscal year. 

Why was Section 194N introduced?

Section 194N of the Income Tax Act was introduced to discourage cash payment and to promote digital transactions. Additionally, it will help the Indian government to keep a track of the cash flow.

Who Should deduct TDS u/s 194N?

The following will have to make TDS deduction under Section 194 N:

  • Any Banking Company (public or private sector)

  • Post Office

  • 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:

  • The payer can deduct tax while making a payment to an individual in cash for an amount over ₹1 Crore from the bank account of the individual. This limit of ₹1 Crore is with respect to the bank/post office account and not as per the individual’s account.

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

  • In case the individual issues a bearer cheque for over ₹1 Crore to a third party, the recipient is not the account holder. It is the third party and the payment in such a circumstance is not done by the bank to the account holder.

  • In 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 Section 194N of the Income Tax Act are:

 

The Income Tax Department can access data of bulk cash transactions. This helps them to easily investigate in case there are any discrepancies.

 

People will opt for digital transactions over the traditional ways of transacting. This is due to the fact that cash withdrawals will attract TDS liabilities.

 

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 who are in consultation with the RBI

  • Bank business correspondents 

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

  • Operators of white label ATM of any Cash Replenishment Agency (CRA) or bank

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

Time Limit to File ITR U/S Section 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 prior to 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.

Limitations Under Section 194N

The limitations associated under Section 194N are:

  • The ₹1 Crore amount limit is applicable for one or more post office/bank accounts maintained by the taxpayer. It is not determined based on his/her account.

  • For example, in case a bank makes a payment that exceeds ₹1 Crore limit to an individual from his /her bank account, then the bank will have to deduct tax.

  • In case an individual issues a bearer cheque that exceeds ₹1 Crore, then the individual or the account holder is not the cash recipient, a third party is. It is unclear whether the payer will have to deduct TDS from the account holder regarding the cheque issued to the third party. This is a grey area in Section 194N. This is a very big limitation when it comes to Section 194N.

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 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

TDS credit U/S 194N

According to the Central Board of Direct Taxes, TDS credit can be claimed by the individual from whose account tax cash deposits were deducted for the particular fiscal year.

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?

TDS is deductible when the cash payment exceeds ₹1 Crore.

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.

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