Understanding Section 194N TDS on Cash Withdrawals in India

India has seen a significant shift towards digital transactions over the past few years, largely driven by government policies aimed at reducing cash usage. One such measure is the introduction of Section 194N of the Income Tax Act, which applies to Tax Deducted at Source (TDS) on cash withdrawals. This article provides a detailed overview of Section 194N TDS, helping individuals and businesses understand its applicability, impact, and compliance requirements.

What is Section 194N?

Section 194N of the Income Tax Act in India is designed to curb excessive cash usage by applying TDS on cash withdrawals exceeding a certain threshold. Introduced in 2019, this measure aims to enhance tax compliance and promote digital transactions. The section primarily targets individuals and entities whose cash withdrawals exceed Rs. 1 crore in a single financial year.

Applicability of 194N TDS

Section 194N applies to cash withdrawals made by the following entities:

Individual taxpayers Companies Hindu Undivided Family (HUF) members Partnership firms Association of Persons (AOPs) Body of Individuals (BOIs)

However, the section does not apply to certain entities such as:

Government bodies Post offices Banks Co-operative banks White-label bank ATM operators Government-authorized agents of a franchise Businesses related to banking services like Navi Commission agents operating under APMC Full-fledged money changers with an official RBI license Any person or agent specifically notified by the central government of India

Threshold Limit for TDS

The threshold for applying TDS under Section 194N is Rs. 1 crore in a single financial year. For individuals or entities who have not filed income tax returns for the previous three years, the threshold is lower at Rs. 20 lakh. These thresholds define the cash withdrawal limit above which TDS becomes applicable.

TDS Deduction Rate

The TDS rate under Section 194N varies depending on the entity's tax compliance history:

2% TDS is charged on cash withdrawals above Rs. 1 crore for individuals who have filed an income tax return at least once during the previous three years. 2% TDS applies to cash withdrawals between Rs. 20 lakh (but not exceeding Rs. 1 crore) for individuals who have not filed any income tax return in the past three years. 5% TDS is applicable to cash withdrawals exceeding Rs. 1 crore in a single fiscal year for individuals who have never filed an income tax return.

Timing of Deduction

TDS is deducted at the time of cash withdrawal. The bank or financial institution is responsible for deducting the tax before disbursing the cash. This ensures that TDS is automatically accounted for when transactions are made.

Exemptions

Some specific withdrawals are exempt from TDS under Section 194N, including:

Withdrawals by government entities and certain specified institutions Withdrawals made for specific purposes outlined in the law

Impact on Withdrawals and Compliance

Section 194N aims to discourage cash transactions and promote digital payments, thereby enhancing tax compliance. Non-compliance with this section can result in legal penalties, including fines and potential audits.

Recent Changes and Compliance Tips

Tax regulations can change frequently, and it is advisable to keep up with any amendments or updates to the law. For the most accurate and current information, consult the latest official guidelines or a tax professional. Regularly reviewing your financial transactions and ensuring compliance can help avoid any legal issues.