194n TDS

5paisa Research Team Date: 19 Apr, 2023 04:15 PM IST

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Introduction

Section 194n of the Income Tax Act, introduced in the Union Budget of 2019, is a significant provision that aims to curb cash transactions and promote digital payments in India. The section mandates the deduction of Tax Deducted at Source (TDS) deduction on cash withdrawals exceeding a specified limit made by individuals, Hindu Undivided Families (HUFs), or any other person.

This provision promotes transparency, reduces the generation of black money, and encourages the usage of digital payment modes. This article explores the conditions of Section 194n in detail and its implications for taxpayers.
 

What is Section 194n TDS?

Section 194n TDS refers to the provision in the Income Tax Act, which mandates the deduction of Tax Deducted at Source (TDS) on cash withdrawals exceeding a specified limit. The Finance Act 2019 introduced this provision, which came into effect on 1st September 2019.

As per Section 194n, a TDS of 2% is to be deducted on cash withdrawals exceeding Rs. 1 crore in a financial year made by individuals, Hindu Undivided Families (HUFs), or any other person. 
 

Section 194n – Income tax Objective

Section 194n of the Income Tax Act aims to promote digital payments, discourage cash transactions, reduce the generation of black money, and improve tax compliance. The provision mandates the deduction of TDS on cash withdrawals exceeding a specified limit, thereby discouraging individuals, HUFs, or any other person from making large cash withdrawals.

By doing so, the government aims to encourage the usage of digital payment modes, which are more transparent and traceable, and promote tax compliance. The provision further curbs the generation of black money, as cash transactions are more prone to being unreported and, therefore, not taxed.

The ultimate goal of Section 194n is to promote a cashless economy, improve tax collections, and curb tax evasion.
 

Deduction of TDS under Section 194n

In a financial year, deduction of TDS under section 194n is carried out if a person withdraws cash (sum or aggregate of sum) that exceeds-

₹ 20 lakhs (if no ITR has been filed for all the three previous AYs), or
₹ 1 crore (if ITRs have been filed for all or any one of three previous AYs).

It is deducted by banks (private, public, and co-operative) or post offices. Taxes are deducted on cash payments exceeding 20 lakhs or 1 crore (as the case may be) made from such bank or post office accounts.  
 

What is the aim of TDS in Section 194n?

TDS in Section 194n discourages cash transactions and promotes digital payments by mandating tax deductions at source on cash withdrawals exceeding a specified limit. The provision requires banks, co-operative banks, and post offices to deduct TDS at a rate of 2% on cash withdrawals exceeding Rs. 1 crore in a financial year made by individuals, Hindu Undivided Families (HUFs), or any other person.

The TDS amount deducted is to be deposited with the government. The individual or entity making the withdrawal can claim credit for the TDS amount while filing their income tax returns.

The provision aims to promote transparency in financial transactions. By discouraging large cash withdrawals, it is expected to encourage individuals and businesses to use digital payment modes, which are more transparent, traceable, and less prone to tax evasion.

The TDS provision in Section 194n is essential in achieving the government's goal of promoting a cashless economy and improving tax collections.
 

TDS Rate under Section 194n

TDS is deductible at a rate of 2% on cash withdrawals exceeding ₹1 crore if the person withdrawing cash has filed an income tax return for any or all of the last three assessment years (AYs).

TDS states that if a cash drawer has not filed ITR to any of her AYs in the last three years, tax deducted is 2% on cash withdrawals over ₹20 lakh and 5% on withdrawals over ₹1 crore.
 

Latest Changes in Section 194n

After the Budget 2023, the threshold limit for annual cash withdrawals increased to Rs 3 crores for the cooperative societies. The threshold limit for TDS under section 194n was reduced to Rs 20 lakhs after the 2020 budget. This applied to taxpayers who have not filed income tax returns (ITRs) for the past three years.

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Frequently Asked Questions

TDS 194n is not applicable if the withdrawals are made by

●    Central or state government
●    Private or public sector bank
●    Any cooperative bank
●    Post office
●    Business correspondent of any bank
●    White-label ATM operator of any bank
●    The central government specified commission agents or traders operating under the Agriculture Produce Market Committee (APMC) for making payments to the farmers on account of the purchase of agricultural produce.
●    Authorised dealers and its franchise agent and sub-agent and Full-Fledged Money Changer (FFMC) licensed by RBI and its franchise agents
●    Any other person notified by the Government in consultation with RBI
 

TDS is deducted by private banks, public banks, cooperative banks, or post offices.

TDS is deductible on cash withdrawals exceeding Rs 20L/1Cr per financial year, depending on ITR filing history. 2% TDS applies for Rs 1Cr+ withdrawals by filers; 2% TDS for Rs 20L+ withdrawals, and 5% for Rs 1Cr+ withdrawals by non-filers.

The objective of Section 194n of the Income Tax Act is to promote digital payments, discourage cash transactions, reduce the generation of black money, and improve tax compliance.

 TDS is not deductible for withdrawals from the post office.