Section 194N: TDS on Cash Withdrawal

What is Section 194N?

Section 194N applies to any cash withdrawals made by an individual from a bank account, co-operative society, or post exceeding Rs.1 crore during the financial year. It applies to the withdrawal of all the sum of money or the aggregate of all sums from a bank in a financial year. As per section 194N of the Act, TDS is required to be deducted when an individual withdraws a sum exceeding Rs 20 lakh in cash during a fiscal year without having filed income tax returns for the previous three Assessment Years.

Note: Starting April 1, 2023, the threshold for TDS on cash withdrawals by co-operative societies has been increased. Tax will now be deducted on withdrawals exceeding Rs. 3 crore, up from the previous limit of Rs. 1 crore.

However, this section is not applicable to the individuals if the payment is made to -

• The government
• Any Private or Public sector bank
• A post office
• A cooperative bank
• Business correspondents of a banking company
• White-label ATM operators
• Any other person notified by the Government of India.

This holds true even if the individual has withdrawn money from different branches of the same bank. However, if the taxpayer holds accounts in multiple banks, the TDS deduction threshold will be 1 crore for each bank, i.e., 2 crores for 2 banks and so on. Let us take an example -

Mr Dhawan has withdrawn the following amounts from different SBI Bank and ICICI Bank branches.

• Rs 50 lakh from Branch A - SBI
• Rs 30 lakh from Branch B - SBI
• Rs 40 lakh from Branch C - SBI
• Rs 20 lakh from Branch D of ICICI Bank

In this case, as per provisions of section 194N, the TDS will be deducted on Rs.20 lakhs, i.e., only on the amount in excess of the threshold of Rs.1 crore.

Since Rs.20,00,000 was withdrawn from ICICI bank; therefore, the total amount of withdrawal from ICICI bank is below the individual threshold limit of Rs.1 crore and is not eligible for TDS deduction.

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Why was Section 194N introduced?

In order to discourage cash transactions and promote the digital India initiative, the government introduced section 194N in Budget 2019. As per this section, every bank, cooperative bank, or institution has to deduct TDS from the transaction value at the time of making the payment at the applicable TDS rates.

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What is the rate of TDS u/s 194N?

Section 194N mandates the deduction of TDS (Tax Deducted at Source) at a rate of 2% on cash withdrawals exceeding ₹1 crore in a financial year. In this scenario, however, if the individual has not filed their income tax returns in the three years prior to the current financial year, the TDS rates change significantly. For cash withdrawals between ₹20 lakh and ₹1 crore, the TDS rate is 2%. For withdrawals exceeding ₹1 crore, the rate increases to 5%.

Note:- If a person has three bank accounts with three different banks, he can withdraw cash of Rs 1 crore * 3 banks, i.e. Rs 3 crore without any TDS.

To escape from paying a higher TDS rate, ensure you file your taxes timely. File Your ITR

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Purpose of TDS Under Section 194N

Under Section 194N, the payer is required to deduct TDS (Tax Deducted at Source) when making cash payments that exceed ₹1 crore in a financial year to a payee. If the payee makes regular cash withdrawals, the payer must deduct TDS once the cumulative amount withdrawn surpasses ₹1 crore in that financial year.

Importantly, TDS is deducted only on the amount exceeding ₹1 crore. For instance, if a person withdraws ₹99 lakh in total during the financial year, and then makes another withdrawal of ₹1.5 lakh, TDS will only apply to the excess ₹50,000.

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Who is Responsible for Deducting TDS u/s 194N?

The person (payer) making the cash payment is responsible for deducting TDS. Listed below are the persons responsible for the TDS deduction.

• A Banking company (whether public or private)
• A cooperative society engaged in the business of banking
• A post office

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When is Section 194N not applicable?

The provisions under section 194N are not applicable in case payment is made to the following person:

• Government
• Banking company
• Co-operative society engaged in the business of banking
• Any business correspondent of a banking company
• Any white-label automated teller machine operator of any bank (including cooperative banks).
• Trader of APMC paying to the farmers
• Any other person as notified by the government.

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Can we Claim a Refund of TDS Deducted u/s 194N?

Yes, you can claim a refund of the TDS deducted u/s 194N or get it adjusted against your total income tax liability. However, to claim a refund of the same, your annual income must not exceed the basic exemption limit. Also, it is mandatory to file an ITR if you want to claim a refund of TDS under section 194N.

In addition to this, it is also important to note that you might have to pay extra tax if you fail to file your ITR. As per the amendment in section 194N in the year 2021, the threshold for TDS deduction for individuals who have not filed their ITR was reduced to Rs.20 lakhs. This means that if you have not filed your ITR for the last 3 years, TDS @2% will be deducted on cash withdrawals exceeding Rs.20 lakhs instead of Rs.1 crore.

If you frequently withdraw large sums of cash, filing your Income Tax Return (ITR) can help you avoid unnecessary TDS deductions under Section 194N. By filing your ITR, you not only stay compliant but also ensure you don’t lose money unnecessarily. File your ITR today and safeguard your hard-earned cash!

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