Section 194N

Section 194N- An Overview

To propagate digital India, the finance minister included Section 194N in the 2019 union budget. Based on this Section a TDS is collected on cash withdrawals over ₹1 crore. For taxpayers who haven't filed an income tax return in the last three years, the TDS threshold limit under Section 194N is lowered in Budget 2020 to ₹20 lakh. If the person withdrawing the cash hasn't filed an ITR for any of the last three AYs, TDS will be withheld at a rate of 2% on cash withdrawals over ₹20 lakh and 5% on withdrawals over ₹1 crore.

What is Section 194N?

A financial year's worth of cash withdrawals from a bank account that exceeds ₹1 crore are subject to Section 194N. It will apply to any withdrawals made from a specific bank within a fiscal year that sums up to the aforementioned amount. Withdrawals made by any taxpayer are subject to the rules in this Section, which include:

• Hindu Undivided Family in particular (HUF)
• A company
• A partnership firm or an LLP
• A group of people or an association of people.

However, it will not be applicable if payment is made to

• The administration
• Every bank (private or public sector)
• Bank cooperative
• A post office
• White label ATM operator of any Bank
• Business associate of a banking organisation
• Under the direction of the Agriculture Produce Market Committee (APMC)
• A specific dealer or commission agent
• Revenue Tax Notification No. 70/2019, dated 20 September 2019
• A franchise's official dealer, agent, or subagent
• A Full-Fledged Money Changer (FFMC) with a license from the RBI or any of its franchisees, subject to the terms of Notification No. 80/2019-Income Tax dated 15 October 2019.

Steps to Calculate The Threshold Limit

Any payment over ₹1 crore that is paid in cash from a bank account must withheld tax from the payer. Each bank or post office account is subject to the yearly restriction of ₹1 crore, on each taxpayer's account.

For instance, a person is allowed to withdraw up to ₹3 crores if they have three bank accounts with three different banks. Cash withdrawals by any taxpayer from their bank accounts would only be subject to TDS under Section 194N.

Separately, under Section 40(A)(3) of the Income Tax return a bearer check payment made for business purposes would not be recognised as an expense. Any payment made each day, whether it be in a single transaction or cumulatively, cannot be greater than ₹10,000.

On or after 1 September 2019, payments will be governed by Section 194N's rules. However, cash withdrawals and payments made during FY 2019–20 are subject to a limit of ₹1 crore.

Why is Section 194N Introduced?

The Finance Bill, 2019, included ‘Section 194N - TDS on cash withdrawals over and above ₹1 crore’ to deter cash transactions in the nation and advance the digital economy.

Who Will Deduct TDS Under Section 194N?

The following entities will deduct TDS under Section 194N before making a cash payment

• All banks, whether they are in the public or private sector.
• Postal services.

Point of TDS Under Section 194N

When paying the payee in cash for an amount that exceeds ₹1 crore in a fiscal year, the payer is obligated to deduct TDS. If the payee regularly takes out cash and the total amount taken out in a fiscal year exceeds ₹1 crore, the payer is required to deduct TDS on the amount. Tax will also be deducted from any amount greater than ₹1 crore.

For instance, the TDS duty only applies to the excess of ₹50,000 if a person withdraws ₹99 lakh overall during the financial year and ₹1,50,000 the following year.

TDS Rate by Section 194N

• 2% on cash withdrawals of more than ₹ 20 lakh and 5% for withdrawals exceeding ₹ 1 crore
• Therefore, in the example above, TDS would be on ₹50,000 at 2%, or ₹1,000
• If the recipient of the funds did not file an income tax return in the three years before the year in question, the maximum tax deduction is reduced to ₹20 lakh.

The TDS will be reduced at:

• A -2% fee will be taken to cash payments and departures of more than ₹20 lakh and up to ₹1 crore.
• 5% is applied to withdrawals over ₹1 crore.

Non-applicability of TDS Under Section 194N to Any Payment Made To

• The executive branch
• Any financial business-related company, cooperative society, or post office
• Any business associate who carries out banking operations under RBI regulations is a banking institution, cooperative society, or similar entity
• White-label ATMs may be operated by any employee of a bank or cooperative society who has been granted permission by the RBI to perform banking activities under the Payment and Settlement Systems Act of 2007 to do so.

Latest Changes in Section 194N

The following are the latest changes in Section 194N:

• The threshold limit for co-operative societies has been increased from Rs. 1 crore to Rs. 3 crore.
• The threshold limit for taxpayers who have not filed an ITR for the past three years has been reduced from Rs. 20 lakh to Rs. 10 lakh.

Advantages of TDS Deduction under Section 194N

The following are the advantages of TDS deduction under Section 194N:

• It helps in tracking cash transactions.
• It reduces the tax liability of the taxpayer.
• It helps in preventing tax evasion.

What is TDS credit u/s 194N?

TDS credit is the amount of TDS that the taxpayer can claim as a deduction against their total tax liability. The TDS credit can be claimed in the ITR filed for the financial year the TDS was deducted.

Who will deduct TDS under Section 194N?

The following persons will deduct TDS under Section 194N:

• Banks
• Co-operative banks
• Post offices

In addition to these persons, any other person responsible for paying any sum in cash to a resident over the prescribed threshold limit will also be liable to deduct TDS under Section 194N.

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