Section 194N - TDS Implications on cash withdrawal

Section 194N is a crucial provision within the Income Tax Act that obliges banks, cooperative banks, and post offices to deduct TDS (tax deducted at source) when an individual withdraws cash exceeding specified thresholds from their accounts during a financial year.

This measure aims to discourage excessive cash transactions and promote digital payments, aligning with the government’s vision of a cashless economy.

Sec 194N of the Income Tax Act applies to withdrawals that the following taxpayers make:

• An individual
• A company
• A Hindu Divided Family (HUF)
• A Body of Individuals (BOI)
• A partnership firm
• An LLP
• An Association of Persons (AOPs)

The primary objective behind the introduction of Section 194N is twofold: to actively discourage individuals from engaging in large cash transactions and to promote the adoption of digital payment methods.

By imposing a TDS on substantial cash withdrawals, the government seeks to curb the circulation of black money (unaccounted cash) and pave the way for a more transparent and efficient cashless economy.

The responsibility of deducting TDS under Section 194N falls upon the following entities:

• Banks (both private and public sector)

• Cooperative banks

• Post offices

These institutions are mandated to deduct the applicable TDS when individuals withdraw cash exceeding the prescribed limits from their accounts maintained with these entities.

The TDS is deducted on cash withdrawals exceeding the following limits:

• If you have filed your income tax returns (ITRs) for any or all of the three preceding assessment years, TDS will be deducted at a rate of 2% on cash withdrawals exceeding ₹1 crore in a financial year.

• If you have not filed your ITRs for any of the three preceding assessment years, they will be deducted at the following 194N TDS rates:

• 2% on cash withdrawals between ₹20 lakh and ₹1 crore

• 5% on cash withdrawals exceeding ₹1 crore

It is crucial to note that TDS under Section 194N is not applicable in the following cases:

• Cash withdrawals by the central or state government.

• Cash withdrawals by banks, cooperative banks, or post offices.

• Cash withdrawals by business correspondents of banks or white-label ATM operators.

• Cash withdrawals made by specific traders, commission agents, or full-fledged money changers (FFMCs) licensed by the Reserve Bank of India (RBI) and notified by the government.

The TDS is calculated based on the total cash withdrawals made by an individual from all their accounts (savings, current, etc.) maintained with a particular bank or post office during the financial year.

If an individual has multiple accounts with the same bank, the cash withdrawal limit applies to the aggregate withdrawals from all their accounts with that bank.

For instance, if an individual has withdrawn ₹99 lakhs from their savings account and subsequently withdraws ₹1.5 lakhs from their current account with the same bank in the same financial year, TDS will be deducted only on the excess amount of ₹50,000 (₹1.5 lakh - ₹1 crore) at a rate of 2%.

The ₹1 crore limit per financial year applies to each bank or post office account. It does not apply to the taxpayer’s accounts as a whole.

For instance, if a taxpayer has 3 bank accounts in three different banks, the threshold increases to ₹3 crores (₹1 crore x 3). Thus, the taxpayer is entitled to a ₹3 crore cash withdrawal TDS-exempt.

It is essential to note that the TDS deducted under Section 194N can be claimed as a refund or adjusted against the total tax liability while filing the income tax return for the corresponding financial year.

The rate of TDS for cash withdrawal varies based on an individual’s return filing status. The table below highlights the TDS rates as per cash withdrawal amounts and tax filing status.

Case 1

Mr. Anil makes multiple cash withdrawals of different amounts during the financial year 2024-25. However, he has not filed tax returns for the preceding three financial years (2021-22, 2022-23, 2023-24), and the last date for filing the returns has expired.

The TDS calculation will be as follows:

Case 2

Mr. Anil has savings and current accounts with a particular bank. He makes the following withdrawals from his accounts during the financial year 2024-25.

Section 194N Income Tax Act computes savings and current account cash withdrawal TDS cumulatively, provided the accounts are maintained in the same bank.

Case 3

Mr. Anil withdraws cash from his savings accounts maintained in different banks during the financial year 2024-25.

When multiple bank accounts are maintained in different banks, the tax deduction limit of ₹1 crore applies to each bank. Thus, in the above example, there will be no TDS deduction under Section 194N, as the amount of cash withdrawal doesn’t exceed ₹1 crore in any of the banks.

The requirements for compliance with Section 194N of the Income Tax Act are as follows:

• Before deducting TDS, authorised banks and post offices must acquire a Tax Deduction and Collection Account Number (TAN).
• These financial institutions must remit the deducted TDS amount within the 7th of the next month.
• The deductor must submit Form 26Q to the government every quarter, within the last date of the following month of the quarter.

Impact on Individuals

The implementation of Section 194N has several implications for individuals, particularly those who deal with high-value cash transactions. Some of the key effects include:

• Increased compliance burden for taxpayers who frequently make large cash withdrawals.
• Encouragement towards digital payments and non-cash transactions
• Monitoring of cash flow and identification of suspicious transactions

Tax Planning Considerations

Individuals subject to TDS under Section 194N should consider the following tax planning strategies to minimise their tax liability

• Utilising digital payment methods for transactions to avoid exceeding the cash withdrawal limits
• Maintaining detailed records of cash withdrawals to accurately report income tax returns.
• Exploring investment options to reduce taxable income and optimise tax efficiency

On cash withdrawals that exceed the prescribed limits, banks and post offices must deduct TDS (tax deducted at source), which is refundable. When you file your income tax return for that financial year, the TDS amount deducted can be claimed as a refund or adjusted against your total tax liability.

For instance, if ₹2,000 TDS was deducted on a cash withdrawal of ₹1.2 crore, and your total tax payable is ₹50,000, the ₹2,000 TDS can be adjusted, reducing your tax payable to ₹48,000.
Alternatively, if you have no taxable income, the entire ₹2,000 TDS can be claimed as a refund.

Thus, the TDS under Sec 194N Income Tax Act is not a permanent tax burden but can be reclaimed when filing your tax returns.

Section 194N is a pivotal step taken by the Indian government to promote a cashless economy and curb the circulation of black money. By imposing TDS on substantial cash withdrawals, this provision aims to discourage individuals from engaging in hefty cash transactions and encourage the adoption of digital payment methods.

While it may seem like an additional burden initially, compliance with Section 194N is essential to avoid legal consequences and contribute to building a more transparent and efficient economic system.

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