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To encourage digital payments and to move towards the cash-less economy, a new Section 194N was introduced in Income Tax Act in the Union Budget 2019 proposed on 5 July 2019 will be applied to the payments made on or after 1 September 2019
Section 194N originally was applicable in case of cash withdrawals of more than Rs 1 crore during a financial year from Public / Private Banks or co-operative bank or Post Office. All individuals and entities including trust would be liable to deduct TDS by Banks etc @ 2% . The payer will have to deduct TDS at the rate of 2% on the cash payments/withdrawals of more than Rs 1 crore in a financial year under Section 194N. The tax shall be deducted on the amount exceeding Rs. 1 crore only.
The Finance Bill, 2020 (as passed by the Lok Sabha) has expanded the scope of Section 194N by providing different tax rates for two different class of persons. Further, it also prescribes two threshold limits.
Threshold of Rs. 20 lakhs and Rs. 1 crore of cash withdrawal
A new proviso has been inserted to Section 194N, which changes the threshold limit for deduction of tax from Rs. 1 crore to Rs. 20 lakh if the person, has not filed return of income (ITR) for three previous years immediately preceding the previous year in which cash is withdrawn, and the due date for filing ITR under section 139(1) has expired.
The deduction of tax for person who has not filed ITR shall be at the rate of
a) 2% from the amount withdrawn in cash if the aggregate of the amount of
withdrawal exceeds Rs. 20 lakhs during the previous year; or
b) 5% from the amount withdrawn in cash if the aggregate of the amount of withdrawal exceeds Rs. 1 crore during the previous year.
The Bank will have to undergo Tedious task of asking all account holder who are withdrawing cash more than 20 Lakhs to submit the Income Tax Returns for the past 3 years. Further bank not only has to ask if Income Tax Returns are filed but have to check if they are filed with in due date as per section 139(1)
The Section 194N does not apply when the cash is withdrawn by following persons
- Any government body
- Any bank including co-operative banks
- Any business correspondent of a banking company (including co-operative banks)
- Any white label ATM operator of any bank (including co-operative banks)
- Any other person notified by the government
In the case of a payment made by a taxpayer through a bearer cheque issued to third party, in excess of Rs 1 crore in a financial year, the recipient of the cash is not the account holder, but a third party. In such a case, the payment is not made by the bank to the account holder.
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