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July 24, 2020

Know who all are exempted from TDS on cash withdrawal u/s 194N

Know who all are exempted from TDS on cash withdrawal u/s 194N

The Government of India to discourage cash transactions in the country and promote digital economy, introduced Section 194N in the Income Tax Act, 1961 for deducting tax at source (TDS) at the rate of 2% on cash withdrawals over and above Rs 1 crore. The Finance Act, 2020 tightened it by lowering the threshold of Rs 1 crore to Rs 20 lakh for those who have not filed their income tax returns (ITRs) for the past three years. Further, the rate of TDS has also been increased to 5% for taxpayers whose withdrawal exceeds Rs 1 crore.

What is Section 194N?

Scope of Section 194N prior to amendment by Finance Act 2020:-

Section 194N is made applicable from September 1, 2019. Every bank or post office shall be required to deduct TDS on cash withdrawal made on or after September 1, 2019. The tax shall be deducted at the rate of 2% on the amount of cash withdrawal exceeding Rs. 1 crore.

Amendment of Section 194N by Finance Act 2020 effective from July 1, 2020:-

The Scope of TDS on cash withdrawal has been extended.

  • TDS @ 2% is required to be deduced if the withdrawer has not filed his tax return for three years and withdrawal during the year exceeds Rs 20 lakhs but less than Rs 1 crore.
  • For withdrawals exceeding Rs 1 crore TDS @ 5% is required to be deducted 

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Who is required to deduct tax under Section 194N?

The below mentioned persons making the cash payment will have to deduct TDS under Section 194N:-

  • Every banking company
  • A co-operative bank
  • A post office

Section 194N will be applicable on withdrawals by which taxpayers?

The section will apply to withdrawals made by following taxpayers:-

  • Individual
  • Hindu Undivided Family (HUF)
  • Company
  • Partnership firm or LLP
  • A local authority
  • Association of Person (AOPs) or Body of Individuals (BOIs)

When shall tax not required to be deducted?

The Central Government, in consultation with the Reserve Bank of India (RBI), is empowered to exempt by way of notification in Official Gazette, persons or class of persons so that payments made to such persons or class of persons shall not be subjected to TDS under section 194N. Accordingly, in exercise of the said power, Central Government issued the following three notifications to provide such exemption:

Notification 68 of 2019 dated 18.09.2019

  • Cash Replenishment Agencies (CRAs) and franchise agents of White Label Automated Teller Machine Operators (WLATMO’s) maintaining a separate bank account from which withdrawal is made only for the purposes of replenishing cash in the ATM’s operated by such WLATMO’s.
  • WLATMO should furnish a certificate every month to the bank certifying that the bank account of the CRA’s and the franchise agents of the WLATMO’s have been examined and the amounts being withdrawn from their bank accounts has been reconciled with the amount of cash deposited in the ATM’s of the WLATMO’s

Notification 70 of 2019 dated 20.09.2019:

  • Commission agent or trader, operating under Agriculture Produce Market Committee (APMC), and registered under any Law relating to Agriculture Produce Market of the concerned State.
  • Such commission agent or trader has to intimate the banking company or co-operative society or post office his account number through which he wishes to withdraw cash in excess of Rs 1 crore in the previous year along with his PAN and the details of the previous year
  • Such commission agent or trader has certified to the banking company or co-operative society or post office that such withdrawal is for the purpose of making payments to the farmers on account of purchase of agriculture produce and the banking company or co-operative society or post office
  • Such commission agent or trader has ensured that the PAN quoted is correct and the commission agent or trader is registered with the APMC, and for this purpose necessary evidences have been collected and placed on record.

Notification 80 of 2019 dated 15.10.2019

  • The authorized dealer and its franchise agent and sub-agent and Full Fledged Money Changer (FFMC) licensed by the RBI and its franchise agent for the purposes of:-
  • Purchase of foreign currency from foreign tourists or non-residents visiting India or from resident Indians on their return to India, in cash as per the directions or guidelines issued by RBI or
  • Disbursement of inward remillances to the recipient benefiCiaries in India in cash under Money Transfer Service Scheme (MFSS) of the RBI
  • A certificate should be furnished by the authorised dealers and their franchise agent and sub-agent, and the Full-Fledged Money Changers (FFMC) and their franchise agent to the bank that withdrawal is only for the purposes specified above and the directions or guidelines issued by the RBI have been adhered to.

Illustrations to understand Section 194N better

Mr A has filed all his returns for the 3 preceding AY’s. He withdraws Rs 25 lakhs from his bank for an urgent medical emergency. Is the bank required to deduct TDS on such withdrawal?

No TDS under Section 194N will be deducted as cash withdrawal is upto Rs 1 crore and Mr A has filed all his returns for the 3 preceding AY’s.

Mr B has not filed his returns for the 3 preceding AY’s. He withdraws Rs 10 lakhs from his bank for travel abroad. Is the bank required to deduct TDS on such withdrawal?

No TDS under Section 194N will be deducted as cash withdrawal is less Rs 20 lakhs. The fact that Mr B has not filed his return for 3 preceeding AY’s will not be considered here.

Mr C has filed all his returns for the 3 preceding AY’s. He withdraws Rs 1.5 crore from his bank for a family function. Is the bank required to deduct TDS on such withdrawal?

TDS @ 2%under Section 194N will be deducted as cash withdrawal is exceeding Rs 1 crore and Mr C has filed all his returns for the 3 preceding AY’s.

Mr X has not filed his returns for the 3 preceding AY’s. He withdraws Rs 30 lakhs from his bank for a medical emergency. Is the bank required to deduct TDS on such withdrawal?

TDS @ 2%under Section 194N will be deducted as cash withdrawal is exceeding Rs 20 lakhs and Mr X has not filed his return for the 3 preceding AY’s.

Mr Y has not filed his returns for the 3 preceding AY’s. He withdraws Rs 1.30 crores from his bank for a medical emergency. Is the bank required to deduct TDS on such withdrawal?

TDS @ 5%under Section 194N will be deducted as cash withdrawal is exceeding Rs 1 crore and Mr Y has not filed his returns for the 3 preceding AY’s.

Compute TDS of Mr. J who has saving and current account with a bank and has not filed returns for the 3 preceding AY’s. The details of cash withdrawn from both the accounts are as follows:

Date of WithdrawalWithdrawal from saving accountWithdrawal from current accountTDS under Section 194N
2019-202050,00,0001,05,00,000[50 lakhs + 1.05 crore – 1 crore] * 2% = 1,10,000
01.05.202015,00,00010,00,000No TDS
Post 01.07.202015,00,00010,00,000[15 lakhs + 10 lakhs – 20 lakhs] * 2% = 10,000
Post 01.07.202025,00,0001,15,00,000[25 lakhs + 115 lakhs – 1 crore] * 5% = 2,00,000

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