TDS on Cash Withdrawal
TDS on cash withdrawals came with Section 194N of Income Tax Act which was introduced by Finance (No. 2) Act, 2019. And was made applicable with effect from 01st September 2019. Sec 194N had a limited scope of TDS on cash withdrawal above 1 crore rupees @ 2%. The Finance Act 2020 increased the scope of TDS on cash withdrawal section 194N and a large number of people will be affected by this amendment which will be effective from 01st of July 2020.
Amendment by Finance Act 2020 in Sec 194N
The Finance Act, 2020 has reduced the threshold limit for TDS on cash withdrawals to Rs.20 Lakhs for those taxpayers who have not filed their income tax returns for the past three years. So, there will two categories of taxpayers having different TDS limit and rates for this section which are as follows:
Taxpayers who have filed their ITR for the past 3 years :-
- TDS Rate – 2% : For TDS Limit – Rs.1 Crore of cash withdrawals per Bank
Taxpayers who have NOT filed their ITR for last 3 years and the due date for filing ITR without late fees i.e. u/s 139(1) has expired:-
- TDS Rate – 2% : For TDS Limit – Rs.20 Lakhs of cash withdrawals per Bank
- TDS Rate – 5% : For TDS Limit – After crossing 1 Crore of cash withdrawals
In both cases, if the PAN is not submitted with the bank then the TDS rate will be increased to 20%.
Applicability of section 194N
In case of cash withdrawal of more than Rs.1crore or Rs.20 Lakhs during a financial year, section 194N will be applicable. The application of section will be done to all sum of money or an aggregate of sums withdrawn from a Post Office, Co-operative Bank, Private or Public Bank in a financial year. This section will be applicable irrespective of the purpose of personal or for business purposes.
The limit of Rs.1crore in a financial year which is to be considered per bank or post office and not the taxpayers’ individuals account.
TDS on Cash Withdrawal Section 194N is applicable from the 01st September 2019 hence any cash withdrawal before this date will not be subject to TDS.
For example, a person having 2 bank accounts with different banks, he can withdraw cash of Rs. 1crore * 2 = Rs. 2 crore without any TDS. The payer will have to deduct TDS of 2% on cash payments/withdrawals more than Rs.1crore in a financial year under sec 194N. If ITR is not filed by the receiving individual for 3 years immediately preceding the year, then the TDS is 2% on the cash payments/withdrawals of more than Rs. 20 lakhs but up to Rs. 1 crore, 5% for withdrawal exceeding Rs. 1crore.
The TDS will be deducted on the amount exceeding the limit and not on the whole amount.
Purpose of the introduction of the section 194N
This section 194N was introduced by the government in the union budget to discourage the cash transaction in the country and promote the digital economy.
Non-Applicability of section 194N on certain categories of persons
- A government body
- Any white label ATM operator of any bank
- Any business correspondents of a banking company
- Any bank including co-operative banks
- Any other persons notified by the government
- Commission agents
- Trader of APMC giving payments to the farmers.
Ambiguity regarding the section 194N
If the taxpayer makes payment through bearer cheque which is issued to a third party, whose amount is more than Rs.1crore in a financial year where the recipient of the cash is not an account holder, but a third party. In such a case, payment is not made by the bank to the account holder. This is the case of the ambiguity and clarity is not provided by Government on such transactions whether TDS is to be deducted or not. In the case of business payments, payments made by the bearer cheque would not be allowed as expenditure under section 40(A)(3) 0f income tax act.
Ambiguity No. 2:-
The TDS deducted can be claimed back is still an ambiguity but the majority of opinion says, same will be reflected in 26AS and one can claim in ITR’s and can be claimed validly. Word TDS is been used as a levy, which is also used with the levy of cess and surcharge and they cannot be claimed back. CBDT should clarify regarding the same.
Taxpayers who have not filed their ITR’s for 3 years immediately preceding the year then the TDS will be applicable above Rs. 20 lakhs up to Rs.1crore by 2% and above Rs. 1crore @ 5%. If the taxpayer has filed ITR for 3 years previous preceding financial years then the limit for the taxpayer will be Rs.1 crore and TDS will be 2%. TDS will be applicable on the amount exceeding the limit and not on the whole amount under section 194N.
CBDT–Income Tax Act :-
Notifications issued by CBDT to exempt certain categories of persons:-
- Notification 68 of 2019 dated 18.09.2019 – Exempted Cash replenishment agencies and franchise agents of While Lable Automated Teller Machines.
- Notification 70 of 2019 dated 20.09.2019 – Exempted Commission agent or trader operating under APMC.
- Notification 80 of 2019 dated 15.10.2019 – Exempted authorized dealer or franchise agent and sub-agent and Full Fledged Money Changer.