Amended Section 194N - TDS On Cash Withdrawals

In an aggressive move to boost a cashless economy in India, the Finance Minister, Ms. Nirmala Sitharaman announced Section 194N under the Income Tax Act, 1961 at the Union Budget 2019. Under its provisions, a TDS rate of 2% will be deducted at source on annual cash withdrawals over Rs 1 crore with effect from 1st September 2019 with respect to banks, cooperative societies and post office accounts.

Objective of Section 194N passed by the Union Budget 2019

The Govt. of India took this step-

to discourage huge cash withdrawals
promote digital payments
keep track of cash flow in the nation
arrest the creation of unaccounted wealth and
gradually phase out black money from India

Section 194N Of The Income Tax Act 1961 Amended Vide Clause 84 Of Finance Act 2020

The Finance Bill 2020 passed by Both Houses of Parliament made a few amendments to the existing scope of Section 194N on 27^th March 2020 with the President of India’s assent. The Bill stiffened TDS provisions for those who have not been filing their income tax returns in the previous years. It reads as follows-

Clause 84 of Finance Act 2020

For section 194N of the Income-tax Act, the following section shall be substituted with effect from the 1st day of July, 2020, namely Every person, being, — (i) a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act); (ii) a co-operative society engaged in carrying on the business of banking; or (iii) a post office, who is responsible for paying any sum, being the amount or the aggregate of amounts, as the case may be, in cash exceeding one crore rupees during the previous year, to any person (herein referred to as the recipient) from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent. of such sum, as income-tax: Provided that in case of a recipient who has not filed the returns of income for all of the three assessment years relevant to the three previous years, for which the time limit of file return of income under sub-section (1) of section 139 has expired, immediately preceding the previous year in which the payment of the sum is made to him, the provision of this section shall apply with the modification that— (i) the sum shall be the amount or the aggregate of amounts, as the case may be, in cash exceeding twenty lakh rupees during the previous year; and (ii) the deduction shall be— (a) an amount equal to two per cent. of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds twenty lakh rupees during the previous year but does not exceed one crore rupees; or (b) an amount equal to five per cent. of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds one crore rupees during the previous year:

Guide To The Latest Amendments To Section 194N of The Income Tax Act, 1961

TDS has been expanded on cash withdrawals in recent amendment to Section 194N of the Income Tax Act, 1961. A TDS rate of 2% will be deducted if the assessee has not filed income tax for 3 years. TDS of 2% applies to cash withdrawal over Rs 20 Lakhs but less than Rs 1 Crore, in a financial year. For cash withdrawals over Rs 1 Crore, TDS of 5% will be charged. If the assessee has filed income tax for the specific financial year, there will be no TDS reduction. However, if the assessee has withdrawn cash amounts of more than Rs 1 Crore, there will be a 2% TDS reduction on the amount. Examples- Case 1 - A has withdrawn Rs 99.50,000 from a bank in a year. He later withdraws Rs, 2,00,000 in March. The TDS will be applicable on Rs 1,50,000 (the excess cash over Rs 1 Crore). The net payment the recipient will receive will be Rs 1,97,000. Case 2- If A withdraws Rs 1,00,00, 000 from his bank in a year and later issues a bearer cheque to B, his friend for Rs 5,00,000 payable in cash, no TDS will be deducted in this case. Though the total amount withdrawn is over Rs 1 Crore, here the recipient and the holder do not have the same bank account. Note: All types of bank accounts maintained by an individual in a bank come under the Rs 1 Crore threshold limits. For instance, if A has a current and a savings bank account in the same bank, the threshold limit of Rs 1 crore will be applied on the aggregate cash withdrawals from both his accounts. Case 3- If A holds an account in different branches of the same bank across the country, the threshold limit of Rs 1 Crore will be applied on the aggregate of cash withdrawals from these branches under the same bank. Case 4- If A holds multiple accounts in different banks and makes a cash withdrawal of more than 1 crore from different banks, TDS will not be applicable to him. Salient Points of Amended Section 194N

This section applies to cash withdrawals from banks including cooperative banks and post office accounts.
The threshold limit of Rs 1 Crore will apply bank- wise and not branch- wise. This is possible due to core banking solutions currently implemented by banks.
TDS on cash withdrawals applies if the aggregate amount of withdrawals in a financial year is more than Rs 1 Crore from one or more bank accounts. In simple terms, this means, the aggregate of cash withdrawals from a person’s savings, current, cash credit, overdraft accounts etc. will be used for determining the threshold limits of Rs 20 Lakhs or 1 Crore in a financial year respectively.
The objective for cash withdrawals i.e. for business or personal reasons is not relevant u/s 194N.
TDS rates will apply on excess cash withdrawal limits. This means if a person withdraws cash more than Rs 20 lakhs or Rs 1 Crore, as the case may be, the TDS rate will be deducted on the excess cash withdrawn and not on the total cash withdrawal.
The TDS deduction rate is 2% and 5% respectively for specific cases where the assessee has not filed tax returns in previous years.

The Amended Section 194N Under TDS (FY 2020-21) will be applicable from 1st July 2020.

Provisions of Amended Section 194N apply to-

An Individual
A Hindu Undivided Family or HUF
A Local Authority
A Company
Partnership Firm/LLP
Body of Individuals (BOIs) or Association of Persons (AOPs)

The payers covered under Section 194N are –

Private and Public Sector Banks
A Post Office
A co-operative bank

Exclusions Under Section 194N-

The Government
Any White Label ATM Operator of any Bank
Banks with the inclusion of cooperative banks
Business correspondent of a banking company
Any other individual notified by the Government of India
Farmers- The Central Govt. has laid down the specifications for trader or commission agent operating under the Agriculture Produce Market Committee (APMC) vide Notification No. 70/2019-Income Tax Dated 20th September, 2019.
The Central Board of Direct Taxation or the CBDT exempts cash withdrawals by an authorized dealer or an agent of its franchise or sub-agent and a RBI licensed Full-Fledge Money Changer (FFMC) or any agent from its franchise from TDS deductions under Section 194N subject to conditions laid out vide Notification No. 80/2019-Income Tax dated 15th October, 2019.

Pros of Amended Section 194N

Huge cash withdrawals will reduce. Digital transactions and payments will increase.
Will aid the Tax Department to access data easily and investigate further into huge cash transactions.
TDS liabilities will deter individuals from carrying out huge cash withdrawals.
A proper automated system will be established for promoting digital payments and a cashless economy.

Challenges of Amended Section 194N The new amended section 194N currently faces the following hurdles-

A robust TDS deduction automated system needs to be introduced for every transaction to identify accounts where cash withdrawals exceed Rs 1 Crore.
Proper installation of this automated mechanism should be conducted by banks and other financial establishments. The biggest challenge are ATMs where execution of the above mechanism is difficult for banks and other financial departments. An automated mechanism should be installed in ATMs where cash withdrawals above Rs 1 crore can be easily identified and TDS deducted.

Conclusion

The Indian Government is frequently introducing monetary reforms to accomplish the goals of a cashless economy. Subsequent to demonetization, the introduction of Section 194N and its latest amendment is a move to promote digital payments and eradicate cash transactions gradually from the country.