Section 194N

Introduction

In the wake of demonetization, the Indian government has taken several measures to promote a cashless economy and curb the circulation of black money. Section 194N of the Income Tax Act imposes Tax Deducted at Source (TDS) on cash withdrawals exceeding a specified threshold. This section aims to discourage large cash transactions and encourage digital payments.

What is Section 194N?

The government introduced Section 194N in the Union Budget 2019, and it took effect on July 1, 2020. The primary objective of this section is to levy TDS on cash withdrawals exceeding Rs 1 crore in a financial year from a single account. This provision applies to withdrawals from banks (both public and private), cooperative banks, and post offices.

The objective of Section 194N

The main objective of Section 194N is to discourage cash transactions and promote digital payments across India. Introduced in the Finance Act, 2019, this section aims to curb the circulation of unaccounted cash by imposing Tax Deducted at Source (TDS) on cash withdrawals beyond a specified limit. By making large cash transactions less favorable, the government encourages individuals and businesses to adopt electronic and digital modes of payment, enhancing transparency and reducing tax evasion.

Deduction of TDS Under Section 194N

Under Section 194N, banks, cooperative banks, and post offices deduct TDS when an account holder’s cash withdrawal exceeds a certain threshold in a financial year. They apply the TDS at the time of withdrawal if the amount crosses the government-set limit. This deduction is applicable to all account holders, including individuals, companies, partnerships, and HUFs, except government bodies, banks, cooperative societies, and white-label ATM operators.

The following entities are required to deduct TDS under this section:

• Banks (Private or Public Sector)
• Co-operative Banks
• Post Offices

However, certain entities and individuals are exempt from the provisions of Section 194N. These include:

• Any government body or agency
• Any banking company, including co-operative banks
• Any corporate correspondent of a banking company, including co-operative banks
• White-label ATM operators of a banking company, including cooperative banks
• Any other person or entity notified by the government

Purpose of TDS in Section 194N

The primary purpose of TDS rates under Section 194N is to monitor and regulate high-value cash transactions. It ensures that large amounts of cash do not flow unaccounted, thus preventing the use of such cash for illegal activities or tax evasion. By mandating TDS on cash withdrawals, the government encourages the shift towards digital banking, which offers better tracking and transparency. Additionally, it helps tax authorities keep a record of substantial cash transactions, making it easier to identify potential tax defaulters.

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TDS Rates Under Section 194N

TDS (Tax Deducted at Source) rates under Section 194N specifies different TDS on cash withdrawal, depending on whether the account holder has been filing Income Tax Returns (ITR) regularly. The purpose of varying rates is to ensure better tax compliance and to discourage large cash transactions.

1. For Individuals or Entities Filing Income Tax Returns (ITR):

• If the account holder has filed ITR for all three previous assessment years, the TDS rate is 2% on the amount of cash withdrawal that exceeds ₹1 crore in a financial year.
• For instance, if a person withdraws ₹1.2 crore in a financial year, the bank calculates TDS at 2% on ₹20 lakh (the amount exceeding ₹1 crore) and deducts ₹40,000 as TDS.
• This rule applies to various account holders, including individuals, Hindu Undivided Families (HUFs), companies, trusts, partnerships, and associations.

2. For Individuals or Entities Not Filing Income Tax Returns (ITR):

• If the account holder has not filed ITR for all three previous assessment years, the TDS rates are stricter:
• 2% on cash withdrawals exceeding ₹20 lakh but up to ₹1 crore in a financial year.
• 5% on cash withdrawals exceeding ₹1 crore in a financial year.

For example, if an individual withdraws ₹80 lakh and hasn’t filed ITR, TDS at 2% will apply on ₹60 lakh (i.e., the amount over ₹20 lakh), which amounts to ₹1.2 lakh as TDS. If the withdrawal exceeds ₹1 crore, the excess amount over ₹1 crore would attract TDS at 5%.

The government structures these rates to discourage the use of cash for large-scale transactions, making it less convenient for individuals relying on unaccounted cash dealings. Additionally, by imposing stricter TDS rates on those who do not file tax returns, the government aims to increase tax compliance. It ensures that regular taxpayers have more favorable conditions for their withdrawals while pushing non-compliant individuals or entities to be more transparent with their financial activities.

Latest Amendments in Section 194N

The following amendments were made to Section 194N effective from July 1, 2020:

• If an individual or entity has not filed ITRs for the last three financial years, TDS will be deducted at 2% on cash withdrawals ranging from Rs 20 lakh to Rs 1 crore and at 5% on withdrawals exceeding Rs 1 crore.
• If the individual or entity has filed ITRs, TDS will be deducted at 2% only on amounts exceeding Rs 1 crore.

Conditions for Reduced TDS Deduction Under Section 194N

To claim a reduced TDS deduction under Section 194N, certain conditions must be met:

1. The ITR must be filed within the specified time limit as per Section 139(1).
2. Newly registered firms are not eligible for a reduced deduction due to the absence of prior filing records.
3. A statement of the previous three years’ ITR filings must be provided by the banking or co-operative society to avail of the reduced TDS rate.

Conclusion

The key objective of Section 194N is to curb large cash withdrawals made by users from bank accounts, thereby reducing the circulation of black money in the economy. By imposing TDS on such withdrawals, the government aims to track large cash transactions and encourage individuals and businesses to move towards digital payments.

Section 194N plays a crucial role in India’s push towards a cashless economy by imposing TDS on large cash withdrawals. It aims to discourage cash transactions and promote digital payments, thereby reducing the circulation of unaccounted money. Both individuals and businesses must be aware of the TDS implications under this section to avoid penalties and ensure compliance with the tax laws.