What is Section 194N?

In the Finance Bill, 2019, section 194N was introduced. Cash withdrawal over ₹ 1 crore within a year will be subject to a TDS of 2%. The tax will only apply to amounts exceeding ₹ 1 crore.

For example, Ashish has withdrawn ₹1 crore and 50 lakhs in a year. Therefore, TDS on ₹ 50,000 would be 2% equal to ₹ 1,000.

The tax deduction limit is reduced to ₹ 20 lakh if the person receiving the funds has not filed a tax return in the three years immediately preceding the year. The TDS will be deducted as follows:

  • 2% on cash withdrawals and payments totaling more than ₹ 20 lakh up to ₹1 crore
  • 5% on withdrawals over ₹ 1 crore

Who is liable to pay TDS on cash withdrawal over ₹1 crore?

This section covers all withdrawals from a specific payer or aggregated (total) withdrawals during a financial year. It applies to withdrawals made by any taxpayer, including:

  • An Individual
  • A Hindu Undivided Family (HUF)
  • A company
  • A partnership firm or an LLP
  • A local authority
  • An Association of Person (AOPs) or Body of Individuals (BOIs)
  • Any bank (private or public sector)
  • A co-operative bank
  • A post-office

Who can deduct TDS on cash withdrawal above ₹1 crore?

Persons (payers) required to deduct TDS under Section 194N are listed below:

  • Any private sector or public sector bank
  • Any co-operative bank
  • Any post office

The provisions of this section do not apply to certain categories of persons (payees). They include:

  • 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

How to Calculate the Threshold Limit?

Here are a few conditions to keep in mind while calculating the threshold limit.

  • If the payer pays an individual in cash from his or her bank account for an amount over Rs 1 crore, he or she shall deduct tax while making the payment.
  • In a financial year, there is a limit of Rs 1 crore per bank account or post office account and not per taxpayer account.

For example - An individual who has three bank accounts with three different banks can withdraw cash of Rs 1 crore from each bank, i.e., withdrawal of Rs 3 crore without any TDS.

  • Whenever any taxpayer (recipient) withdraws cash from his or her bank account, TDS will only be collected in accordance with Section 194N.

For example - if a bank makes a cash payment of more than Rs 1 crore during an FY to its account holder (e.g., any taxpayer), the bank will need to deduct TDS.

  • If the taxpayer makes a payment of over Rs 1 crore through a bearer cheque to a third party, the recipient of the cash is not the account holder but rather the third party. If this is the case, the bank will not pay the account holder. The above situation raises the question of whether a bearer cheque issued to a person (like a vendor) for collection of payment from the bank will be covered by section 194N? Is the bank required to deduct tax on the account holder's funds in respect of a bearer cheque issued to a third party.

Additionally, business payments made using a bearer check are not allowable as an expenditure under section 40(A)(3). Payments exceeding Rs 10,000 per day (per transaction or cumulatively) cannot be claimed as a business expenditure.

  • In the fiscal year 2019-20, cash payments/withdrawals will be limited to Rs 1 crore. The provisions of Section 194N, however, will only apply to payments made from 1 September 2019 onward.
Points to Note
  • Cash recipients cannot submit Form No. 15G/15H to the bank and cannot apply for a lower deduction certificate under Section 197.
  • In calculating three years immediately preceding the year, if the return date under Section 139(1) has not expired, that assessment year is not to be taken into account.