Section 194N of Income Tax

Section 194N is applicable on more than Rs. 1 Crore cash withdrawals from the bank account, co-operative society or post office during a financial year.
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194N of Income Tax Act
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3 mins read
23-August-2024
Section 194N of the Income Tax provides guidelines for Tax Deducted at Source (TDS) deductions based on the amount withdrawn by a person in a specific financial year. Individuals or eligible entities must deduct TDS based on the amount withdrawn and the number of times they have filed their ITR. The Indian government focuses heavily on the deduction of TDS for almost all transactions to ensure that there is effective tax reporting and no tax evasion. Hence, it introduced TDS on cash withdrawals with specific limits and the number of ITRs filed in the last three years to hold individuals and entities liable to deduct TDS from the withdrawn amount.

If you are an individual or registered entity and have withdrawn cash above Rs. 20 lakh, you will be liable to deduct TDS on the amount and deposit it with the government.

This article will help you understand everything about section 194N of the Income Tax Act and how you can utilise its provisions to ensure better tax compliance.

What is section 194N?

Section 194N of the Income Tax Act deals with Tax Deducted at Source (TDS) deduction on the amount withdrawn as cash physically by individuals and other eligible entities. As per section 194N of the Income Tax Act, every individual or eligible entity must deduct 2% TDS if the sum or aggregate sum of cash withdrawn in a financial year exceeds:

  • Rs. 20 lakh if the individual or entity has not filed an Income Tax Return (ITR) for all of the last three assessment years.
  • Rs. 1 Crore if the individual or entity has filed an Income Tax Return (ITR) for all or any of the last three assessment years.
Generally, as most individuals and entities file their ITRs regularly, the limit of Rs. 1 Crore is commonly applicable. In most cases, entities withdraw cash to make payments to other entities. If the cash withdrawal is above Rs. 1 Crore (Rs. 20 lakh if no ITR is filed in the last three AYs), the payer is liable to deduct TDS from the cash withdrawal amount and deposit it with the government before the due date.

The section is applicable to the following entities making withdrawals:

  • An individual
  • A Hindu Undivided Family (HUF)
  • A company
  • A partnership firm or LLP
  • A Body of Individuals (BOIs) or an Association of Person (AOP)
However, the provisions of section 194N will not apply if the payment is made to:

  • The Indian government
  • Any public or private sector bank
  • A post-office
  • A co-operative bank
  • Business correspondents of a registered banking company
  • White-label ATM operators of any Indian bank.
  • Commission agents or specified traders operating under the Agriculture Produce Market Committee (APMC) as per Notification No. 70/2019-Income Tax Dated 20th September 2019.
  • Full-Fledge Money Changer (FFMC) licensed by the RBI as per Notification No. 80/2019-Income Tax dated 15th October 2019.
  • Any other eligible person or entity notified by the Indian government.

Why was section 194N introduced?

The Indian government introduced section 194N in the Income Tax Act in the Union Budget 2019. The main aim of introducing section 194N was to discourage cash withdrawals and transactions and promote digital transactions in India. Furthermore, by reducing large cash transactions, the government hoped to curb the circulation of black money and unaccounted funds in the economy. With the government’s push for a digital India, the introduction of this section encourages individuals and businesses to adopt digital modes of payment, thereby increasing financial inclusion.

Initially, the threshold limit for TDS deduction under section 194N of the Income Tax Act was Rs. 1 Crore in a financial year. However, the Finance Act 2020 amended this threshold, introducing different limits based on the income tax return filing status of the person withdrawing cash.

What is the rate of TDS u/s 194N?

As per the provisions of section 194N of the Income Tax Act, the payer making the payment after withdrawing cash above Rs. 1 Crore must deduct 2% TDS. However, if the payer withdrawing the cash has not filed ITR in the last 3 years, TDS must be deducted at 2% for withdrawal amounts above Rs. 20 lakh and below Rs. 1 Crore and 5% if the withdrawal amount is above Rs. 1 Crore.

Cash withdrawal amount TDS rate (if ITR is filed for any or all three previous AYs)TDS rate (if ITR is not filed for the last three years)
Up to Rs. 20 lakh NilNil
Above Rs. 20 lakh and below Rs. 1 Crore Nil2%
Above Rs. 1 Crore2%5%


Note: If an eligible entity has multiple bank accounts, the limit exceeds per bank account. For example, if you have 4 bank accounts, you can withdraw Rs. 1 Crore from each, i.e., Rs. 4 crores, without deducting any TDS under section 194N of the Income Tax Act.

Who will deduct TDS under section 194N?

As per the provisions of section 194N of the Income Tax Act, the person withdrawing cash and making payment to another entity is liable to deduct TDS and deposit it with the government. Here are the eligible entities:

  • Any private or public sector bank
  • A post office
  • A co-operative bank
However, the provisions of section 194N do not apply to:

  • Any government body
  • Any registered bank, including co-operative banks
  • Any white label ATM operator operating in India of any bank, including co-operative banks
  • Commission agent or trader of Agriculture Produce Market Committee (APMC) withdrawing cash to make payments to farmers.
  • Any other person notified by the Indian government under any other act, section, or notification.

What is the point of TDS under section 194N?

Payers withdrawing cash and making payments above Rs. 1 Crore in a financial year are liable to deduct TDS under section 194N of the Income Tax Act. However, there are some main points for the Indian government to introduce section 194N in the Union Budget 2019. These are:

Discouraging high-value cash transactions

The government imposed a TDS deduction requirement on large cash withdrawals and subsequent transactions to reduce the reliance on cash. Furthermore, the government wants to encourage businesses and individuals to adopt digital payment methods to increase financial inclusion and create a more accountable financial system.

Curbing black money

High-value cash withdrawals are often associated with tax evasion and unaccounted wealth. By levying TDS on such withdrawals, the government can better monitor and control the flow of money and ensure it is not used for illicit purposes. Furthermore, individuals and entities are more likely to maintain proper records and report their income accurately to avoid the additional tax burden.

Promoting effective tax filing

Under section 194N, the government has set threshold limits and TDS rates based on whether an individual has filed income tax returns for the last three assessment years. Individuals who regularly file their tax returns benefit from a higher threshold (Rs. 1 Crore) before TDS is applicable. As failure leads to a higher TDS rate, it encourages individuals and entities to file their Income Tax Returns regularly.

Improved financial transparency

Before section 194N, it was difficult for the Indian government to monitor and track large sums of cash withdrawn. Now, due to its TDS provisions, the government can track large sums of money moving through the banking system. This information is valuable for identifying suspicious activities and ensuring that funds are being used for legitimate purposes.

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Latest changes in section 194N

Here are the latest changes in section 194N of the Income Tax Act:

  • If the payer has not filed an ITR for the last three assessment years, TDS is liable to be deducted at the rate of 2% on amounts between Rs. 20 lakh and Rs. 1 Crore and 5% if the cash withdrawal amount is above Rs. 1 Crore in a financial year.
  • If the payer has already filed the ITR for the current year, a TDS deduction is not required. The only requirement is to deduct TDS at 2% on withdrawal amount exceeding Rs. 1 Crore.
As per the latest changes, individuals and entities must meet the following requirements if they want to claim a reduced TDS under section 194N of the Income Tax Act:

  • The payer must submit the ITR within the given time frame according to the provisions mentioned under section 139.
  • Recently registered firms or business entities can not claim a reduced TDS deduction as they do not have any prior ITR returns filed.
  • A bank or co-operative society must submit a statement stating their business of banking or post-office to file ITR for the last three assessment years.

Conclusion

India has shifted towards a digital economy, where the majority of transactions are executed through digital methods. The push towards a digital economy started with the Indian government’s focus on discouraging cash payments by introducing section 194N of the Income Tax Act. Under its provisions, TDS is liable to be deducted on cash withdrawals exceeding Rs. 1 Crore at 2% for those who have filed income tax returns for the last three years. For non-filers, TDS is 2% on withdrawals over Rs. 20 lakh and 5% on withdrawals over Rs. 1 Crore in a financial year. The provisions help promote digital transactions and provide better monitoring of large cash transactions for the government to curb illicit use.

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Frequently asked questions

Can we claim a refund of TDS u/s 194N?
Yes, you can claim a refund of the TDS deducted under section 194N of the Income Tax Act when filing your income tax return if your total tax liability is less than the TDS deducted. Ensure all income and TDS details are accurately reported in your ITR form to facilitate the refund process.

What is the withdrawal limit u/s 194N?
The withdrawal limit under section 194N of the Income Tax Act is Rs. 1 Crore in a financial year for individuals who have filed income tax returns for any or all of the last three assessment years. For those who have not filed returns for these years, the limit is Rs. 20 lakh in a financial year.

How to avoid TDS u/s 194N?
To avoid TDS under section 194N, limit your cash withdrawals to below Rs. 1 Crore if you have filed income tax returns for the last three assessment years. If you haven't filed returns, keep your withdrawals below Rs. 20 lakh. Additionally, digital payment methods should be considered to avoid the provisions of section 194N of the Income Tax Act.

What is the tax rate under section 194N?
The tax rate under section 194N is 2% on cash withdrawals exceeding Rs. 1 Crore in a financial year for individuals who have filed income tax returns for any or all of the last three assessment years. For those who have not filed returns, the tax rate is 2% on withdrawals exceeding Rs. 20 lakh and 5% on withdrawals exceeding Rs. 1 Crore in a financial year.

What is Section 194N of the Income Tax Act notification?
Notification No. 70/2019-Income Tax Dated 20th September 2019 states that the provisions of section 194N will not apply if payment is made to commission agents or specified traders operating under the Agriculture Produce Market Committee (APMC). They will also not apply to Full-Fledge Money Changer (FFMC) licensed by the RBI as per Notification No. 80/2019-Income Tax dated 15th October 2019.

What is the analysis of section 194N?
Section 194N aims to reduce large cash transactions, encourage digital payments, and curb black money by imposing TDS on high-value cash withdrawals. Furthermore, the section improves financial transparency and taxation compliance.

Can we get a refund of TDS u/s 194N?
Yes, you can get a refund of the TDS deducted under section 194N if your total tax liability is less than the TDS amount. To claim the refund, accurately report your income and TDS details when filing your income tax return. The excess TDS will be refunded after the Income Tax Department successfully processes your return.

How do I treat section 194N in income tax?
To treat TDS under section 194N in income tax, include the cash withdrawal amount in your total income and report the TDS deducted in your tax return. You can claim credit for the TDS against your total tax liability if the TDS exceeds your tax liability.

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