Section 194N of the Income Tax Act is an important provision that applies to cash withdrawals. This section mandates TDS be levied on large cash withdrawals made by individuals, firms, or entities from their bank accounts. The purpose of this provision is to encourage a shift towards a digital economy and also curb tax evasion.
What is Section 194N?
Section 194N came into effect from July 1, 2019. Under this section, a bank, cooperative society, or post office is required to deduct TDS at varying rates on cash withdrawals exceeding a certain threshold in a financial year. The threshold limit is divided into two categories:
- For withdrawals up to ₹1 crore: No TDS is deducted if the total cash withdrawal in a financial year is below ₹1 crore.
- For withdrawals exceeding ₹1 crore: If the withdrawal exceeds ₹1 crore in a financial year, TDS is deducted at a rate of 2% for individual taxpayers and 5% for entities (such as companies or firms).
This TDS deduction is applicable only on withdrawals made in cash. Digital transactions or withdrawals made by cheque or demand draft are not subject to TDS under Section 194N.
Who is affected?
- Individuals: Those who frequently withdraw large amounts of cash from banks for business or personal use.
- Entities: Firms, companies, and other organizations that deal with significant cash transactions.
- Banks/Post Offices: The deducting agents responsible for collecting TDS on these withdrawals.
Key Points to Remember:
- Threshold Limit: TDS is only deducted on cash withdrawals above Rs. 1 crore, and the rate also varies depending on the amount.
- Exemption: No TDS is deducted if the total cash withdrawal is less than Rs. 1 crore in a year.
- No Impact on Business/Profession: If the person withdrawing the cash is involved in a business or profession and the withdrawal is for business use, then they may not face TDS under certain conditions.
Example:
Mr. Sharma, a businessman, withdraws Rs. 1.5 crore from his bank account in a financial year.
- As his total withdrawal exceeds Rs. 1 crore but is less than Rs. 2 crore, TDS is deducted at the rate of 2%.
- So, TDS = 2% of Rs. 1.5 crore = Rs. 3,00,000.
Mr. Sharma will thus receive Rs. 1,47,00,000 (after TDS deduction) in his bank account.
Filing the TDS Return:
Banks or post offices deducting TDS under this section file quarterly TDS returns in Form 26Q. These returns should also include details about the TDS deducted on cash withdrawals. The deducted amount is then deposited with the government.
Conclusion:
Section 194N aims to reduce cash transactions and thus ensure transparency in the financial system. Thus it’s important for account holders to be aware of this provision and the TDS deductions applicable to large cash withdrawals. With this, the government also encourages more people to opt for digital methods of payment, promoting a cashless economy.
– Ketaki Dandekar (Team Arthology)
Read more about Section 194N here – https://cleartax.in/s/194n