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
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