Section 194N of Income Tax

Did you know that Tax is deducted if your cash withdrawal is above the certain limit. Let’s understand the tax deduction on cash withdrawal in a simplified language. To promote digital transactions, Government of India has been trying various measures. Demonetization and Digital India Campaign are two popular initiatives taken to reduce the usage of paper money. Introduction of TDS on cash withdrawal was on similar agenda which was to encourage the digital economy.

Section 194 of the Income Tax Act, 1961 deals with the Tax Deducted at Source (TDS) on cash withdrawals above a certain limit. As per this section, any person who withdraws cash from a bank or a cooperative bank or a post office exceeding the specified limit is liable to pay TDS at the rate of 2% on the amount withdrawn. The current limit for TDS on cash withdrawals is Rs. 1 crore per financial year. However, this limit may change from time to time based on the government’s notifications.

It is mandatory to levy TDS on cash withdrawals exceeding Rs. 1 crore. For example, if you withdraw Rs. 1,30,00,000 during a financial year, the tax liability is only to the excess amount, which is Rs. 30,00,000.

The payer must deduct 2% TDS on cash payments exceeding Rs. 1 crore. So, considering the example above, chargeable TDS = Rs. 30,00,000 x 2% which is equals to Rs. 60,000/-

Furthermore, if the person making the cash withdrawal does not provide their Permanent Account Number (PAN) or provides an incorrect PAN, the TDS rate would increase to 5%.  However, if the payee hasn’t filed income tax returns for the 3 immediate preceding years, the Section 194N exemption limit would be Rs. 20,00,000. In that case, the payer must deduct 2% TDS on payments between Rs. 20 lakh and Rs. 1 crore, and 5% on withdrawals exceeding Rs. 1 crore.

Who is liable to pay TDS under Section 194N applicability?

Individuals, HUFS, Companies, Partnership Firms/LLP, Local authorities, AOP/BOIs. The tax must be deducted by the payer while making the payment in cash from a taxpayer’s bank account if the amount exceeds Rs. 1 crore. The specified threshold is per bank or post office account and not a taxpayer’s account.

Provision of Section 194/a does not apply when payment is made to:

The government body, any bank, a business correspondent of any banking company, a white label ATM operator of any bank, anyone notified by the Government.

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