TDS-on-Cash-Withdrawals

Section 194N: TDS on Cash Withdrawals

Section 194N: TDS on Cash Withdrawals

The Union Budget of 2019 implemented various amendments to the existing sections of the Income Tax Act. As part of the changes, the Budget also included new sections, including Section 194M and Section 194N. These sections have been formulated in order to further discourage cash transactions and to move the country a step closer to the Digital India objective. In this article, we briefly discuss Section 194N of the Income Tax Act.

The Finance Bill, 2019

The following extract is from the Finance Bill 2019 and mentions the insertion of Section 194N:

Section 194N: Every person who is responsible for paying any sum, or as the case may be, aggregate of sums, in cash, in excess of INR 1 Crore during the previous year, to any person (herein referred to as the recipient) from an account maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to 2% of sum exceeding INR 1 Crore, as income-tax..”

The above extract from the Bill is accompanied by other specifications that are explained further on in this article.

Overview

Initiatives were taken by the Government of India to promote digital payments and to ensure a less-cash economy. In order to encourage the people to follow the cashless transaction methods, multiple measures were proposed in the Union Budget of 2019. One of the measures is the latest inclusion in the Income Tax Act of Section 194N. Section 194N of the Income Tax Act states that Tax Deducted at Source (TDS) will be levied on cash payments in excess of INR 1 Crores in aggregate made during a particular year, by a bank, co-operative bank or post-office, to any person from an account maintained by the recipient. It should be noted that TDS would be applicable at the rate of 2% of the cash withdrawal. Section 194N will take effect from the 1st of September, 2019.

TDS Deduction Details

Section 194N of the Income Tax Act states that the following:

If the aggregate sum of cash withdrawals from a bank account by the respective account holder crosses the threshold limit of INR 1 Crore for a previous year, then TDS at a rate of 2% will be applicable on the excess amount is withdrawn after the INR 1 Crore limit. This shall take effect from the 1st of September, 2019.

Applicability

Section 194N will be applicable to any person (Recipient) who withdraws a sum of, or an aggregate of sums, that is in excess of INR 1 Crore, in cash, in a particular year. It should be noted that the account from which the Recipient withdraws the amount should be maintained by the Recipient as well. This Section 194N is applicable when the Recipient withdraws cash from either of the following:

  • Banking Company (To which the Banking Regulation Act of 1949 must be applicable, or any bank/banking institution referred to in Section 51 of the same Act.)
  • Co-operative Society; that engages in carrying out the business of banking.
  • Post Office

Non-Applicability

However, Section 194N of the Income Tax Act will not be applicable to any recipient if they are any one of the following:

  • The Government of India
  • Any Banking Company/Co-operative Society that is engaged in the business of banking.
  • Post Office
  • A business correspondent of a Banking Company/Co-operative Society that is engaged in the business of banking as per the guidelines issued in the Reserve Bank of India Act of 1934 by the RBI.
  • Any white label ATM operator of a Banking Company/Co-operative Society that is engaged in the business of banking as per the guidelines issued in the Payment and Settlement Systems Act of 2007 by the RBI.
  • Any person or a class of persons, through a notification in the Official Gazette, specified by the Central Government of India in consultation with the Reserve Bank of India.

Other Features of the Section

The following are the other specifications of Section 194N of the Income Tax Act.

  • Section 194N is applicable to cash payments that exceed INR 1 Crore during a previous year from the 1st of April of a particular year to the 31st of March of the following year.
  • Banks and similar entities mentioned in the Section generally make payments in cash against an instrument only; namely cheques. The respective account holders majorly issue such cheques. It should be noted that TDS is not applicable when an account holder requests the bank to issue a bearer draft/ bankers cheque, which is cashable at a different location or time. In simple words, the bearer cheque of a bank does not fall under the definition of cash in the context of this Section.
  • It is clear that TDS is applicable only if the aggregate of the payments includes the sum that exceeds INR 1 Crore.
  • Section 194N now brings about the necessity for banks and similar entities to maintain tab of every payment made in cash and exceeds INR 1 Crore in a previous year.
  • The limit of INR 1 Crore is applicable for each account maintained by the bank or similar entities. For instance, if an entity has a Current Account and an Overdraft Account, the limit of INR 1 Crore will be applicable for both the accounts. Similarly, if the entity maintains more than a single account from which cash payments can be made by a bank, the limit is applicable for each of those accounts. Furthermore, if the entity has branches throughout the country and maintains separate accounts for each branch, the limit is applicable for every branch regardless of the account holder being the same.
  • The provision states that TDS will be applicable when an account holder withdraws more than INR 1 Crore in cash. Therefore, even though the Recipient is the term used in this context, it is the account holder who mandates the bank to make a cash payment to the recipient. A Recipient need not necessarily be the account holder. As long as the recipient and the account holder are not the same, and the cash payment is through bearer cheques, TDS will not be deductible.
  • The provisions under Section 194N of the Income Tax Act also states that the deduction is by way of Income Tax.
  • The Section mentions the cases of the exempted category of payments. These include payments made to the Government, Banks, Co-operative Societies and Post Offices. This means that any person making payments to such entities are exempted from deduction of TDS irrespective of the amount withdrawn as cash.

Latest Notification on 20th September 2019

As per the notification dated 20th September 2019, exempted TDS for making payment to farmers viz., the commission agents or traders specifies the commission agent or traders operating under Agriculture Produce Market Committee (APMC). The exact text of the notification is provided below:

In exercise of the powers conferred by clause (v) of the proviso to section 194N of the Income-tax Act, 1961 (43 of 1961), the Central Government after consultation with the Reserve Bank of India, hereby specifies the 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, who has intimated to the banking company or co-operative society or post office his account number through which he wishes to withdraw cash in excess of rupees one crore in the previous year along with his Permanent Account Number (PAN) and the details of the previous year and has certified to the banking company or co-operative society or post office that the withdrawal of cash from the account in excess of rupees one crore during the previous year 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 has ensured that the PAN quoted is correct and the commission agent or trader is registered with the APMC, and for this purpose, necessary evidence has been collected and placed on record.

The notification is provided below:

TDS Exemption under Section 194N

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