Section 194N - Demystifying the provision of TDS on cash withdrawal

Government has imposed tax deduction at source on cash withdrawal above certain limit to discourage cash payments in the economy and to boost digital payments.

 

The Union Budget 2019 has introduced Section 194N for deduction of tax at source (TDS) on cash withdrawals exceeding Rs 1 crore to discourage cash payments. However, the said section 194N has been amended by Finance Act, 2020 by clause 83A of the Finance Bill, 2020 as passed by the Lok Sabha.


Substitution of new section for section 194N.


83A. For section 194N of the Income-Tax Act, the following section shall be substituted with effect from the 1st day of July, 2020, namely:-


Payment of certain amounts in cash.

“194N. Every person, being,-

(i) a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act);

(ii) a co-operative society engaged in carrying on the business of banking; or

(iii) a post office,

who is responsible for paying any sum, being the amount or the aggregate of amounts, as the case may be, in cash exceeding one crore rupees during the previous year, to any person (herein referred to as the recipient) from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent of such sum, as income-tax:


Provided that in case of a recipient who has not filed the returns of income for all of the three assessment years relevant to the three previous years, for which the time limit to file return of income under sub-section (1) of section 139 has expired, immediately preceding the previous year in which the payment of the sum is made to him, the provision of this section shall apply with the modification that-

(i) the sum shall be the amount or the aggregate of amounts, as the case may be, in cash exceeding twenty lakh rupees during the previous year; and


(ii) the deduction shall be-

(a) an amount equal to two per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds twenty lakh rupees during the previous year but does not exceed one crore rupees; or

(b) an amount equal to five per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds one crore rupees during the previous year:


Provided further that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the first proviso shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification:


Provided also that nothing contained in this section shall apply to any payment made to-

(i) the Government;

(ii) any banking company or co-operative society engaged in carrying on the business of banking or a post office;

(iii) any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of India under the Reserve Bank of India Act, 1934;

(iv) any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2017: 

Provided also that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the provision of this section shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification.


Analysis of Section 194N as amended by Finance Act 2020


  1. Who shall deduct the TDS?

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

  • Any bank (private or public sector)

  • A co-operative bank

  • A post office

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

  • Any government body

  • Any bank including co-operative banks

  • Any business correspondent of a banking company (including co-operative banks)

  • Any white label ATM operator of any bank (including co-operative banks)

  • Any other person notified by the government

2. When to deduct TDS?


The provisions will apply on two types of persons

(i) TDS of 2 per cent on cash withdrawal of Rs. 1 crore or more in a financial year.


(ii) It is provided that in case of a person who has not filed his income tax return for last three assessment years relevant to previous year immediately preceding the previous year for which time limit to file the return of income u/s 139(1) is expired,


Rate of TDS and threshold limit shall be-


(a) 2 per cent from Rs. 20 Lakh to Rs. 1 crore, and (b) 5 per cent above Rs. 1 crore.


For example- If cash is withdrawn on 14th Sep, 2020


Relevant three year would be:-


PY 2020-21 (AY 2021-2022) - Current year, hence ignored

PY 2019-20 (AY 2020-2021) - Time limit to file ITR u/s 139(1) has been extended till 30th Nov,2020 - Hence ignored

PY 2018-19 (AY 2019-2020) - To be considered

PY 2017-18 (AY 2018-2019) - To be considered

PY 2016-17 (AY 2017-2018) - To be considered


AYs 2017-18, 2018-19, and 2019-20, the due dates specified in section 139(1) have expired and hence can be only considered for the purpose of Section 194N.


3. Threshold Limit - Bank wise


The limit of Rs. 1 crore and 20 lakh as above shall apply bank-wise and not branch-wise. This is possible due to core banking solutions implemented by all banks.


For example, a person having three bank accounts with three different banks, he can withdraw cash of Rs 1 crore * 3 = Rs 3 crores without any TDS.


4. Threshold limit- Aggregate of all accounts


The aggregate of cash withdrawal from all types of accounts maintained by the person i.e savings account, current account, cash credit account, overdraft account, etc. of the same person shall be aggregated to determine the threshold limit of Rs. 1 crore or Rs. 20 lakh, as the case may be.


5. TDS on full withdrawal or only on excess amount


If the cash withdrawal amount in a year exceeds Rs. 1 crore or Rs. 20 Lakh froma particular bank, TDS will apply only on the excess amount of cash withdrawal over Rs. 1 crore or Rs. 20 Lakh, as the case may be, and not on the entire amount of cash withdrawal.


6. The purpose of cash withdrawal is not relevant i.e whether cash withdrawal is for business or personal purpose, TDS shall be applicable aggregating both type of withdrawal.


Amendment in Section 198 - Tax deducted is income received.


Section 198 of the Income Tax Act, 1961 has been amended incorporating the proviso to the section providing that for the sum deducted in accordance with the provisions of section 194N for the purpose of computing the income of an assessee, shall not be deemed to be income received.


In other words, the amount of cash withdrawal on which tax is deducted under section 194N shall not be considered as income of the recipient. 


Amendment in Rule 37BA


New sub rule 3A has been inserted in Rule 37BA

"(3A) Notwithstanding anything contained in sub-rule (1), sub-rule (2) or sub-rule (3), for the purposes of section 194N, credit for tax deducted at source shall be given to the person from whose account tax is deducted and paid to the Central Government account for the assessment year relevant to the previous year in which such tax deduction is made.


In other words,


  • Credit of tax deducted at source under section 194N shall be given to the person from whose account, TDS has been deducted and paid. It has to be claimed only by the person from whom tax is deducted. In other words, the credit for tax deducted at source under section 194N shall be available to the deductee only.

  • Credit of tax deducted at source under section 194N shall not be allowed to apportioned over the years but only allowed in the previous year in which such tax deduction is made. Any excess credit after setting off the tax liability shall be allowed to get refund.

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