194N – TDS on cash withdrawal

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Last updated on January 20th, 2023 at 01:03 pm

TDS on cash withdrawal – Some Unanswered Questions

In the Union Budget 2019,  the FM mentioned some measures for promoting a less cash economy. One of the important provisions among them is the withholding tax on cash withdrawals.  In order to encourage cashless transactions, Finance Minister proposed the imposition of tax deducted at source @ 2% on the withdrawal of cash from bank accounts in excess of Rs. 1 crore.

Section 194N – TDS on Cash Withdrawl

Every person, who is,––

(i) a banking company to whom the Banking Regulation Act, 1949 applies;

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

(iii) a post office,

who is responsible for paying any sum or aggregate of sums, in cash, in excess of Rs. 1 crore during the financial year, to any person from an account maintained by him /her with it shall,

at the time of payment of the such sum, deduct an amount equal to  2% of a sum exceeding Rs 1 crores, as income tax.

Do you think anyone withdraws such a huge sum of cash?? cash withdrawals of more than Rs 1 crore? 

The government is time and again promoting digital transactions and discouraging the use of cash. Demonetization done in FY 2016-17 was historic and still unforgettable. After demonetization, the use of cash for transactions was reduced by the public at large. Hence, many individuals believe that this provision is unnecessary since cash transactions are reduced post-demonetization. Some wonder if the super-rich withdraws such big amounts.  In spite of this, the data published by PTI for FY 2017-18 is surprising:

Cash withdrawals of more than Rs 11 trillion in FY 17-18

In FY 2017-18 just 448 entities withdrew over Rs. 100 crore each.

The cumulative withdrawal stands at approx. Rs. 5.56 lakh crores in FY 17-18.

Not just business entities but even individuals withdrew cash in such large amounts. Over 7,300 people have withdrawn Rs 1.57 lakh crore and the withdrawal value range from Rs 10-100 crore.

As per PTI news, almost 2 lakh individuals and business entities withdrew more than Rs 1 crore in cash from bank accounts in FY 17-18.

These entities had cumulatively withdrawn over Rs 11.31 lakh crore.

This data clearly suggests the need to again discourage cash transactions and a measure the FM seems to be fair to introduce the TDS on cash withdrawals.

Having said that, still many businesses like Transporters, Hotels, etc. especially in Tier-2 and Tier-3 cities in India require to withdraw cash in order to make payments to their staff.  The workers/ laborers still prefer cash instead of cards due to a lack of facilities or maybe a lack of confidence in using technology.

What is TDS on cash withdrawal [Section 194N]?

Tax u/s 194N will be deducted at source if aggregate cash withdrawals in a financial year

  • Exceeds Rs 1 crore for the person who has filed ITRs for all or any one of three previous Assessment Years.
  • Exceeds Rs 20 lakhs for the person who has NOT filed ITRs for all the three previous Assessment Years.

What is the TDS rate u/s  194N?

In the case of the person, where this section triggers when cash withdrawal exceeds Rs 1 crore [i.e The person who has filed ITRs]

  • TDS @ 2% on cash withdrawals in excess of Rs 1 crore.

In the case of the person, where this section triggers when cash withdrawal exceeds Rs 20 lakhs [i.e The person who has NOT filed ITRs]

  • TDS @ 5% on cash withdrawals in excess of of Rs 20 lakhs and up to Rs 1 crore.
  • TDS @ 2% on cash withdrawals in excess of Rs 1 crore.

Note: Sec 194N was introduced in Union Budget 2019 and effective from 1st September 2019 (Applicable for FY 2019-20 AY 2020-21)

Do you get the credit of tax deducted on cash withdrawals?

Definitely YES.

It is to be noted that this is not a tax on the withdrawal of cash. It is a tax deduction at source and the amount so deducted shall be eligible for credit against tax liability in respect of income of the year.

Let’s understand TDS computation on cash withdrawal with an example 

The TDS will be imposed on the amount in excess of Rs 1 crore. If a person has already withdrawn Rs 98 lacs cash from his account with a bank. He withdraws another Rs 5 Lacs today. In this case, while making the payment of Rs  5 lacs the tax will be deducted on the amount in excess of Rs 1 crore.

Hence, in this case, 2% of Rs 3 lacs (Rs 98 lacs + Rs 5 lacs – Rs 1 cr)  i.e Rs 6,000 will be deducted by the bank, and the balance of Rs. 4,94,000/- will be paid.

Who will be exempted from TDS u/s 194N despite the cash withdrawals exceeding the prescribed limits? 

 Section 194N has specifically mentioned the list of payments that are exempted from the levy of this TDS. Accordingly, the payments done to the following are excluded:

(i) the Government;

(ii) any banking company, co-operative bank or post office;

(iii) any business correspondent of a banking company or co-operative bank, in accordance with the relevant guidelines issued by RBI

(iv) any white-label automated teller machine operator in accordance with the authorization issued by the Reserve Bank of India

(v) any other person, which the Central Government may specify in consultation with the RBI (by notification in the Official Gazette).

  • Commission agents or traders operating under APMC for making payments to farmers for the purchase of agricultural produce.
  • Authorized dealers and its franchise agent and sub-agent and Full-Fledged Money Changer (FFMC) licensed by RBI and its franchise agents

Will “bearer cheques” or “drafts” be considered cash withdrawals?

Many businesses issue bearer cheques to the workers instead of cash. The question remains whether such bearer cheques will be considered as cash withdrawals.  Prima facie, any bearer cheque is practically a cash withdrawal, and keeping the intent of the “Less- Cash” economy in mind, we feel that bearer cheques should be considered as withdrawals. However, in such a case the worker who received the bearer cheque will receive the short payment after deduction of TDS and might not be just on him. Similarly, the demand drafts should not be considered in withdrawals. The clarity on this is yet awaited.



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CA Janhavi Phadnis

 

Disclaimer: The above content is for general info purpose only and does not constitute professional advice. The author/ website will not be liable for any inaccurate / incomplete information and any reliance you place on the content is strictly at your risk.

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