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Published on:

February 5, 2025

Udeetta Sarma

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Section 194N of Income Tax Act - TDS on Cash Withdrawal

The Indian government introduced Section 194N under the Income Tax Act to introduce a digital economy and fight black money. The provision states that TDS on cash withdrawals shall be deducted when an individual withdraws more than the prescribed limit during a financial year. There has been a lot of discussion around Section 194N, and even more so when it comes to individuals and businesses who depend on large cash transactions.

In this article, we discuss how Section 194N works, the TDS rates under the section, the cash withdrawal limits imposed as per the Income Tax Act section, and how this affects various taxpayers in India.

What is Section 194N of the Income Tax Act?

Section 194N was introduced via Union Budget 2019-20 to limit cash transactions on the part of a taxpayer and ensure transparency in financial transactions made by the taxpayer. The provision states that TDS will be deducted at the prescribed rate if any person or entity withdraws a particular amount of cash from a bank, post office or cooperative society. Depending on the annual cash withdrawals, individuals or organisations must pay TDS, along with any applicable TDS on whether they have paid Income Tax Returns (ITRs) in the past three financial years.

You might also be interested in ‍Section 133(6) of the Income Tax Act.

TDS Rates Under Section 194N

TDS rates under section 194N are based on the quantum of cash withdrawal and the status of the filing of the taxpayer. For taxpayers who do not file ITR, the rates may differ significantly from those who file the returns regularly.

1. For Individuals or Companies That Have Filed ITR in Past Three Years:

Threshold Limit: ₹1 crore

TDS Rate: 2% on amounts over ₹1 crore

For example, if someone withdraws ₹1.2 crore in a financial year, TDS will be applicable on ₹20 lakh (the excess amount) at 2%, which will be TDS of ₹40,000.

2. For Individuals or Entities who have not filed ITRs in the last 3 Years:

For Withdrawals Between ₹20 lakh and ₹1 crore: 2% TDS on the amount exceeding ₹20 lakh
For Withdrawals Above ₹1 crore: 5% TDS on the amount exceeding ₹1 crore

For if a person has not filed the ITRs and a withdrawal of ₹90 lahks is made then TDS will be levied on ₹70lahksh (amount exceeding 2 lahksh) at 2% meaning TDS of ₹1.4 lahks.The TDS will increase to 5% for amounts over ₹1 crore. For example, if a person withdraws ₹1.5 crore, the TDS will be applied to ₹50 lakh at the rate of 5%, which translates to ₹2.5 lakh.

‍TDS on Cash Withdrawal Limits Under Section 194N

‍Section 194N provides for a threshold limit for cash withdrawal from office banks and financial institutions before TDS becomes applicable. These thresholds vary depending upon the individual or entity filing ITRs.

‍1. If you are an account holder who has already filed ITRs:

No TDS if you withdraw up to a crore in a financial year
TDS shall be applicable at the rate of 2% on the amount exceeding ₹1 crore when the amount of withdrawals becomes more than ₹1 crore.

2. For Account Holders Who Have Not Filed ITRs:

TDS will apply to cash withdrawals exceeding ₹20 lakh in a financial year.
For amounts between ₹20 lakh and ₹1 crore, 2% TDS is charged.
TDS is 5% on the people whose amounts are more than ₹1 crore.

To keep learning more about income tax laws in our country you can also refer to Section 10 of the Income Tax (IT) Act: Exemptions and Allowances.

‍Why Was Section 194N Introduced?

‍Section 194N was introduced with several objectives:

Promote Digitalizing Transactions:

The taxation on big cash withdrawals is aimed at deterring the use of cash for high-worth transactions and pushing towards a more digitalized transaction method that can be traced more easily.

Curb Black Money:

These provisions curb the circulation of black money mainly in the informal sector where a portion of large cash withdrawals is taxed at the source.

Encouragement for Tax Compliance:

The provision advising filers of ITRs to avoid TDS at higher rates encourages individuals and businesses (a substantial portion of the Indian population) to comply with the tax system and file returns regularly.

‍Exemptions Under Section 194N

‍Not all individuals or entities fall under the category of Section 194N. There are several exceptions, especially from government agencies and financial institutions. These include:

Central or state government departments
Banks including cooperative banks
A white-label ATM operator and a business correspondent
Entities that were notified specifically by the government

Such exemptions are meant to avoid saddling these crucial service providers and institutions with the TDS burden under Section 194N.

‍Impact of Section 194N on Taxpayers

‍Section 194N has far-reaching practical implications for the taxpayers:

For Regular Taxpayers:

In case a person or business has increasingly filed their tax returns also he will continue to get the ₹1 crore threshold limit and will not additionally face any TDS except if he receives that cash quantity out of his operated account.

For Non-ITR Filers:

Individuals and businesses that haven’t filed their ITRs over the last three years will be subjected to increased TDS rates. This can impose a financial burden on individuals who rely on significant cash withdrawals but have neglected to meet their tax filing obligations.

How to be Tax-Free:

If large amounts of cash are required there is a planning opportunity by which you can draw on funds provided you stay under the tax exemption limits. Switching to digital payment options could also help you avoid TDS deductions for your business.

Impact on Business:

Businesses making large cash withdrawals regularly should take note of Section 194N, as it may impact their cash flows in case the prescribed limits of withdrawal are exceeded.

‍Streamlining Tax Compliance with Swipe

‍Compliance is tough. Section 194N of the Income Tax Act is just one example of this to arrive. We at Swipe make it easy for people and companies to be on top of their tax obligations. We help businesses track their finances in real-time, offering better insights so that businesses will know when to pay and how to comply. Tired of TDS deductions, go ahead with a simple solution to your transaction. So start using Swipe today and begin the journey to understanding finances and being fully compliant!

‍Conclusion

‍Our mandate is data-driven, as with everything else we do, so it is no surprise that Section 194N of the Income Tax Act is a logical progression of our four-pronged approach towards building a more economically transparent, accountable and digital economy. The government is trying to reduce black money circulation and bring transparency to the system by imposing TDS on cash withdrawals of big denominations. You would feel this provision is applicable for individuals and businesses to know this for managing their finances and avoiding unnecessary TDS deductions. With the country heading toward a cashless economy, taxpayers can embrace digital payments and be free from the complexities and burdens of TDS on cash withdrawals.‍

FAQ

‍1. Can I Withdraw ₹10 Lakh Cash from a Bank Without TDS?

Yes, ₹10 lakhs can be withdrawn in cash without any TDS because this amount is below the threshold limit of ₹20lakh for non-filers of ITR.

2 . What If I Take Out Cash from Several Banks?

Applications for cash withdrawal limits will be applicable separately for every bank. In case of withdrawal of such large amounts from many banks, TDS will be deducted in each institution if the limit is exceeded at each bank.

3. Are ATM Cash Withdrawals Covered Under Section 194N?

Yes, if you withdraw from an ATM also it cumulates as a cash withdrawal and TDS will apply if the cumulative amount exceeds the prescribed limits for the financial year.

4 . Consequences of Not Filing ITR for the Past 3 Years?

For cash withdrawal, you will have higher TDS: (5%) if you have not filed your ITRs for the last three years, and (2%) if you have not filed an ITR for a cash withdrawal between ₹20 lakh and ₹1 crore.

5. How to Avoid TD Ash Withdrawals?

If you don’t want TDS to be applied at the time of withdrawal, then keep your withdrawals within the limit of ₹1 crore (if you file ITR regularly) or ₹20 lakh (if you do not) in aggregate. Also, try making digital modes of payment to step less to cash withdrawal.