Understanding TDS for Cash Withdrawals Over Rs 1 Crore: The Impact of Section 194N
Transferring money from a bank account may seem straightforward, but there's a regulatory framework in place that specifies certain conditions under which tax is deducted at source (TDS). This article aims to clarify the applicability and implications of TDS for cash withdrawals over Rs 1 crore, as governed by Section 194N of the Income-tax Act, 1961.
What is TDS and Why is it Relevant?
Interest earned on bank fixed deposits and post office deposit schemes is sometimes subject to TDS (Tax Deducted at Source). However, it's important to understand that the deduction of TDS on cash withdrawals from a bank account is not automatically applicable for withdrawals that are within your own funds. TDS is, however, applicable when you receive any form of income, such as salary, interest, dividend, and other forms of income.
TDS for Cash Withdrawals Over Rs 1 Crore and Section 194N
Section 194N of the Income-tax Act, 1961, introduces a unique TDS regime for cash withdrawals over Rs 1 crore from a bank account in a financial year. This regulation came into effect on July 1, 2020, with some specific conditions and exceptions.
Automated Cash Withdrawal TDS
1. Mandatory TDS for Unfiled Tax Returns (Rs 20 Lacs - Rs 1 Crore): If an individual has not filed an income tax return (ITR) for the last three financial years and the time limit for filing ITR u/s 1391 has expired, TDS will be deducted at 2% on cash withdrawals between Rs 20 lakhs and Rs 1 crore. This is applicable for withdrawals across all bank accounts maintained by the individual.
2. TDS on Amounts Over Rs 1 Crore: In cases where the total cash withdrawal in a financial year exceeds Rs 1 crore, TDS will be levied at a 5% rate. This applies irrespective of the number of bank accounts the individual maintains.
Exceptions to TDS
There are certain categories of entities, such as government bodies, banks, business correspondents of banking companies, and white label ATM operators, that are exempt from deducting TDS under Section 194N. Only if these entities are paying cash to an individual account holder is TDS applicable.
Facts and Clarifications
1. Withdrawal from Single vs. Multiple Accounts: If an individual has multiple bank accounts, the TDS limit of Rs 1 crore does not accumulate across these accounts. For instance, if an individual has three bank accounts, they can withdraw up to an aggregate of Rs 1 crore without TDS applying to any of the withdrawals.
2. TDS on Bearer Cheques: Section 194N applies to cash payments made in bearer cheques to a third party, but not to the initialholder of the account. This introduces a layer of complexity as it may affect how TDS is applied in certain business transactions.
3. Relevance to Business Transactions: TDS under Section 194N is particularly relevant to business owners and corporate entities as it can impact the payment process for business expenditures exceeding Rs 10,000 in a single transaction or in aggregate.
Section 194N was introduced as part of the Union Budget 2019 to promote a digital economy and discourage cash transactions, aligning with the government's wider objectives to enhance transparency and combat black money.
Understanding and adhering to the provisions of Section 194N can help individuals and businesses avoid unexpected TDS deductions and ensure compliance with Indian tax laws.