Section 194N of Income Tax

Section 194N was introduced by the government in the Union Budget 2019 and came into effect on 1 July 2020. This provision of the Income Tax Act requires Tax Deducted at Source (TDS) on cash withdrawals exceeding specified limits within a financial year. If an individual has not filed income tax returns (ITRs) for the previous three assessment years, TDS is applied once total cash withdrawals exceed ₹20 lakh. In contrast, for individuals who have filed ITRs for at least one of those three years, the threshold is higher, at ₹1 crore.

This provision aims to encourage proper tax filing and reduce large cash transactions. Understanding Section 194N can help individuals and businesses manage withdrawals efficiently and maintain better compliance with tax regulations.

What is Section 194N of Income Tax?

Section 194N of the Income Tax Act was introduced in the Union Budget 2019 and became effective from 1 July 2020. Its main aim is to reduce large cash transactions and encourage digital payments. Under this provision, Tax Deducted at Source (TDS) applies when cash withdrawals from a bank exceed certain limits within a financial year.

If an individual has not filed income tax returns for the previous three assessment years, TDS is applicable once withdrawals exceed ₹20 lakh. However, if returns have been filed for at least one of those years, the threshold increases to Rs. 1 crore. TDS is generally charged at 2% or 5%, depending upon the withdrawal amount and ITR filing status. For co-operative societies, a higher threshold of Rs. 3 crore applies. Importantly, TDS is deducted only on the amount above the specified limit, ensuring proportionate tax compliance.

In summary

The 194n of income tax act requires tax deducted at source (TDS) on cash withdrawals above specified limits. It applies to withdrawals from banks, co-operative banks, and post offices, helping improve tax compliance while allowing eligible taxpayers to claim TDS credit through their income tax return.

• Sec 194N of income tax act applies TDS when annual cash withdrawals from a single bank, co-operative bank, or post office exceed Rs. 1 crore for ITR filers. For specified non-filers, the threshold is Rs. 20 lakh in a financial year.
• TDS is charged at 2% on withdrawals above Rs. 1 crore for ITR filers. For eligible non-filers, 2% applies on withdrawals between Rs. 20 lakh and Rs. 1 crore, while 5% applies on withdrawals exceeding Rs. 1 crore.
• Section 194N allows taxpayers to claim TDS credit or a refund, if eligible, by filing their income tax return.
• The provision applies to cash withdrawals made from banks, co-operative banks, and post offices.
• These rules are applicable to eligible cash withdrawals made on or after 1 July 2020.

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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 aim of TDS in Section 194N?

Tax Deducted at Source (TDS) under Section 194N of the Income Tax Act is applicable to cash payments exceeding Rs. 1 crore made to a payee in a financial year. If multiple cash payments are made throughout the year, TDS will be deducted when the cumulative amount reaches Rs. 1 Crore. 

For instance, if a payee receives a total of Rs. 99 lakh in cash payments during the financial year and then receives an additional Rs. 1,50,000, TDS will only be applicable on the excess amount of Rs. 50,000.

Applicability of Section 194N

Section 194N applies to any individual who withdraws cash from their bank account(s), where the total cash withdrawals exceed Rs. 1 crore in a financial year. This provision is applicable to all financial institutions, including commercial banks, cooperative banks, and post offices.

TDS under Section 194N is applicable to the following categories of taxpayers when they make cash withdrawals beyond the prescribed limit:

• Individual taxpayers
• Hindu Undivided Families (HUFs)
• Companies
• Partnership firms and Limited Liability Partnerships (LLPs)
• Associations of Persons (AOPs)
• Bodies of Individuals (BOIs)

Institutions from which withdrawals trigger TDS:

The TDS applies when cash is withdrawn from:

• Banks (including public, private, and cooperative banks)
• Post offices

Withdrawals made through cheque encashment at the bank counter or direct cash transactions.

How to calculate threshold limit under Section 194N

• The threshold limit under Section 194N is calculated based on the total cash withdrawn during a financial year from a particular bank, co-operative bank, or post office. The limit is not calculated by combining withdrawals made across different banks.
• All cash withdrawals from different accounts held with the same bank are added together to determine whether the threshold has been crossed. This includes withdrawals made through bank branches, ATMs, and other eligible cash withdrawal modes.
• If you hold accounts with multiple banks, the threshold is calculated separately for each bank. For example, you can withdraw up to the applicable limit from each bank without combining the amounts across banks. 
• Once the applicable threshold is exceeded, the bank deducts TDS on the amount as per the provisions of Section 194N. The applicable threshold and TDS rate depend on your income tax return filing status and other conditions specified under the Income-tax Act. 

Compliance requirements under Section 194N

• Banks, co-operative banks, and post offices responsible for deducting TDS under Section 194N must have a valid Tax Deduction and Collection Account Number (TAN) before deducting tax. 
• TDS should be deducted at the time of making the cash payment whenever the applicable cash withdrawal limit is crossed during the financial year. 
• The deducted TDS amount must be deposited with the Central Government within the prescribed due dates under the Income Tax Act. 
• The deductor must file quarterly TDS returns in Form 26Q within the applicable due dates to report the tax deducted.
• Banks should maintain accurate records of cash withdrawals, TDS deductions, and deposits to ensure proper compliance and avoid reporting errors. 
• Taxpayers should verify that the deducted TDS appears correctly in their tax records and keep supporting documents for future reference, if required. 

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.

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?

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Who will deduct TDS under Section 194N?

Under Section 194N of the Income Tax Act, the responsibility to deduct TDS lies with the organisation that makes the cash payment. TDS is deducted by the following entities when cash withdrawals exceed the prescribed limit during a financial year:

• Banking companies, including both public and private sector banks
• Co-operative banks engaged in the business of banking
• Post offices

These entities must deduct TDS before releasing cash if the withdrawal crosses the applicable threshold under Section 194N. The deduction is made at the time of payment, provided the conditions specified in the Income Tax Act are met.

The responsibility to deduct TDS does not rest with the person withdrawing the cash. Instead, it is the bank, co-operative bank, or post office making the payment that must calculate, deduct, and deposit the applicable tax with the Income Tax Department. This helps improve tax compliance and enables better tracking of high-value cash transactions. 

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.

Implications of Section 194N

A. Impact on individuals

The implementation of Section 194N carries several implications for individuals, especially those frequently handling large cash withdrawals:

• Increased compliance requirements for taxpayers who often withdraw substantial cash amounts.
• Encouragement to adopt digital payment methods over cash transactions.
• Enhanced monitoring of cash flows, aiding in the identification of suspicious activity.

B. Tax planning considerations

Individuals affected by Section 194N can consider these tax planning strategies to reduce their tax liabilities:

• Using digital payment methods to stay below cash withdrawal limits.
• Keeping thorough records of cash withdrawals to ensure accurate income reporting.
• Exploring investment avenues to lower taxable income and enhance tax efficiency.

When is Section 194N not applicable?

Section 194N provisions do not apply when payments are made to the following entities:

• Government bodies
• Banking companies
• Cooperative societies involved in banking
• Banking company business correspondents
• White-label ATM operators of any bank (including cooperative banks)
• APMC traders making payments to farmers
• Any other individuals or entities as notified by the government

Latest changes in section 194N 2026

Section 194N does not depend on the current year's ITR. It considers the relevant preceding assessment years.

and remove the line- Banks or co-operative societies must submit a declaration confirming their banking or postal business status for the last three assessment years.

Is Section 194N TDS refundable or not?

Section 194N of the Income Tax Act mandates Tax Deducted at Source (TDS) on cash withdrawals exceeding prescribed limits from banks and post offices. This TDS is refundable upon filing your income tax return.

The deducted TDS can be either:

• Adjusted against your total tax liability: If your total tax payable exceeds the TDS amount, the TDS can be offset against your tax liability, reducing your overall tax burden.
• Claimed as a refund: If you have no taxable income or if the TDS amount exceeds your tax liability, you can claim a full refund of the TDS.

Therefore, TDS under Section 194N is not a permanent tax and can be recovered through the income tax return filing process.

Points to remember

• Cash recipients cannot submit Form No. 15G/15H to the bank, nor can they request a lower TDS certificate under Section 197.
• When calculating the three preceding years, any assessment year for which the Section 139(1) return filing deadline has not passed should be excluded.

Can you claim a refund of TDS deducted under Section 194N?

Yes, you can claim a refund or adjust the TDS deducted under Section 194N against your total income tax liability. However, this is only possible if your annual income falls below the basic exemption limit and you file your Income Tax Return (ITR).

Filing your ITR is mandatory to initiate the refund process. According to the 2021 amendment, if you haven’t filed your ITR for the last three assessment years, the TDS threshold reduces from Rs.1 crore to Rs.20 lakh, and a 2% TDS is applicable on cash withdrawals beyond this lower limit.

If you regularly withdraw large amounts in cash, it’s advisable to file your ITR every year. This not only helps avoid unnecessary TDS but also keeps you compliant with tax laws and ensures you can claim rightful refunds.

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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