Sarvesh Prabhukhanolkar

The intention behind the section

TDS on cash withdrawals is enacted by Section 194N. The purpose behind this section is to discourage the cash economy by restricting how much cash you can withdraw. Another secondary intention can be widening the tax net by making more and more people file income tax returns.

Applicability

From which Financial Year?

This provision under Section 194N is made applicable from FY 2019-20. Initially, the section was about deducting tax @ 2% on cash withdrawals exceeding ₹1 Crore. But after the amendment by Finance Act 2020, this section checks whether the person in question has filed ITRs* for any one of the last three previous years or not. Now here, “financial years for which, due of filing of ITR is over, as on or before the first day of the financial year of withdrawal” will only be considered.

*(ITRs: Income Tax Returns)

Applicable to whom?

This section applies to the following types of assesses:

1. Individual
2. Hindu Undivided Family
3. Partnership or LLP
4. Companies
5. Association of Persons
6. Body of Individuals

The section also provides that it will not be applicable withdrawals by following:

1. Government Offices
2. Bank or Co-Op Society carrying Banking Business
3. Business Correspondent of Bank or Co-Op Society carrying Banking Business
4. White label ATM Operators of Bank or Co-Op Society carrying Banking Business
5. Persons notified by Central Government in consultation with RBI
   • Moneychangers licensed by RBI
   • Commission agent or trader operating under Agriculture Produce Market Committee
   • Cash Replenishment Agencies and Franchise of White Label ATM Operators

Who is required to deduct?

Every bank, the post office is required to deduct the tax under this section, wherever applicable. The term ‘bank’ includes Nationalised, Public, Private and Co-Operative banks, hence practically every bank is covered.

Limits

This is the place where Section 194N gets a little tricky. It decides the limit based on whether you have filed the ITRs for any one of the previous three financial years or not. Thereafter, it allows you to withdraw cash from your accounts without deducting tax up to that limit. But once you cross the limit, it requires your bank or post office to deduct tax, with the rate to be decided based on the criteria of filing of ITRs.

            Let’s dive deep into the details.

Case 1: The Person have not filed ITR for any of the previous three financial years

Here the person can withdraw up to ₹ 20 Lakhs without deducting any tax. But when the total (cumulative) amount of withdrawals crosses the limit of ₹20 Lakhs, the bank will deduct tax at the rate of 2% on withdrawals exceeding ₹20 lakhs. This rate of 2% will be applicable till you are within the limit of ₹1 Crore. Once you cross the limit of ₹1 Crore, the rate of tax will be 5% for an amount exceeding ₹1 Crore.

Let’s understand this through the example of Mr. Amitabh, who has not filed any ITR for the last three financial years.

Case 2: The person has filed ITR for at least one of the previous three financial years.

The matter is pretty simple here as the person, in this case, has filed the ITR. The limit of withdrawal without deduction of tax is ₹1 crore. Once his total amount of withdrawal crosses the limit, the tax will be deducted at 2% on the amount exceeding ₹ 1 Crore.

Let’s understand this through the example of Mr. Abhishek, who has filed ITR for any of the last three financial years.

If you have noticed, there is a difference in the Total TDS, even though the total amount of withdrawals is the same. In Case 1, TDS is ₹1,65,000 whereas in Case 2, TDS is merely ₹2,000 for the same cash withdrawals of ₹ 1.01 Crore.

This difference is due to the rates and limits applicable to the individuals based on the filing of ITRs.

Case 3: Multiple accounts with Same Bank

Another case in this section 194N is that your withdrawals “from One or More Accounts maintained “will be considered to calculate the total amount of withdrawals. So, when you have a Current Account and Savings Account with one bank, the bank will consider cash withdrawn from both of them together for checking whether you have crossed the limit or not.

Let’s simplify this through an example.

Mrs. Aishwarya has not filed any ITRs for the previous 3 financial years, and her withdrawal details from her Savings and Current Accounts with SBI are as follows:

In this case, though Mrs. Aishwarya has not crossed the limit of ₹20 lakhs in her Savings account, her total withdrawals crossed the limit on 5^th January. Hence tax will be deducted on her withdrawals from that date.

Tax is deducted, now what should I do?

You can file ITR and claim the tax deducted. If your tax payable on income is less than tax deducted, you will get a refund. When you have income below the basic exemption limit, you will get a refund of the entire TDS under 194N.

I hope this article helped you understand the provisions of deduction of tax on cash withdrawals. If you have any questions, please comment down and I’ll explain.

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Reference

This article is my interpretation of Section 194N read with Rule 37BA.

To search the section and rule use this link:

https://incometaxindia.gov.in/pages/indiacode/income-tax-act.aspx