TDS APPLICABILITY ON CASH WITHDRAWALS

INTRODUCTION ON SECTION 194N

To discourage cash transactions and to promote digital economy, the government has introduced ‘Section 194N – TDS on cash withdrawals over and above Rs 1 crore’ has been introduced through the Finance Bill, 2019.

However, the said section 194N was amended by Finance Act, 2020 by clause 83A of the Finance Bill, 2020 as passed by the Lok Sabha and thus the Scope of TDS on cash withdrawal has been extended to include tax deduction on cash withdrawal over and above Rs.20 lakh ,this amendment came to effect from 01st July 2020.

DEFINITION

This section applies when.

WHO IS RESPONSIBLE TO DEDUCT TAX?

APPLICABILITY

This section applies to cash withdrawal done by any PERSON as defined u/s

2(31) of Income Tax Act,1961

However Sec 194N will not apply to withdrawals made by following taxpayers: -

The Government,
Any banking company or co-operative society engaged in carrying on the business of banking or a post office,
Any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking,
Any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking,
Farmers – Central Government specifies the commission agent or trader, operating under Agriculture Produce Market Committee (APMC),
Authorised dealer and its franchise agent and sub-agent; and Full-Fledged Money Changer (FFMC) licensed by the Reserve Bank of India and its franchise agent,
Provided also that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the provision of this section shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification.

RATE OF TDS

According to this section the payer is required to deduct tax at the rate of 2% once the annual withdrawal from one or more accounts maintained by the person exceeds Rs 1 crore.

And as per the amendment in case of a recipient who has not filed the returns of income for all the three assessment years relevant to the three previous years, for which the time limit of file return of income under sub-section (1) of section 139 has expired, immediately preceding the previous year in which the payment of the sum is made to him, the provision of this section shall apply with the modification that—

(i) The sum shall be the amount or the aggregate of amounts, as the case may be, in cash exceeding Rs 20 lakh during the previous year. And

(ii) The deduction shall be—

(a) An amount equal to two per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds twenty lakh rupees during the previous year but does not exceed one crore rupees: or
(b) An amount equal to five per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds one crore rupees during the previous year:

Tax is to be deducted at the time of making the payment to the recipient.
TDS u/s 194N applies on cash withdrawals only more than prescribed threshold. This means TDS will not apply on the first one crore (or twenty lakhs as the case may be) of cash withdrawal during the previous year. It applies only on the amount withdrawn in cash above the prescribed limit.
The language of the draft bill (in 2019) provided that the cash withdrawal from single account should be considered for this purpose. However, this anomaly was duly rectified by inserting the phrase “one or more accounts maintained by the recipient”.
Therefore, cash withdrawals from all accounts of the same person should be considered in aggregate for reckoning the threshold limit.

OTHER POINTS

As per section 198 all sums deducted in accordance with the foregoing provisions of this Chapter 17 shall, for the purpose of computing the income of an assessee, be deemed to be income received.

Section 198 was amended by adding a proviso to Section 198 and now is a part of the Finance Act, 2019, which is reproduced as under –

"Provided further that the sum deducted in accordance with the provisions of Section 194N for the purpose of computing the income of an assessee, shall not be deemed to be income received."

The above amendment itself intends to mean that the tax deducted on withdrawal of cash shall not be the income of an assessee and hence section 194N is not against any income and the recipient is never going to treat the cash withdrawn as its own income.

NOTE IT DOWN

Section 206AA requires every taxpayer who receives taxable income to furnish their PAN to the payer of such income. This applies to both the resident as well as non-resident recipients.

A recipient who fails to furnish PAN to the person making a payment would suffer TDS at the higher of the rates mentioned below:

At the rate specified in the relevant provision of the Act
At the rate or rates in force, i.e., the rate prescribed in the Finance Act (Finance Act 2019 for FY 2019-20)
• At the rate of 20%

So, failing to furnish your PAN or furnishing a wrong PAN will lead to a TDS of not 2% rather 20%.

Disclaimer:“Information contained herein is for informational purposes only and should not be used in deciding any particular case. The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts have been made to provide authentic information, it is suggested that to have better understanding and obtaining professional advice after thorough examination of particular situation.”

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