Section 194N under IT Act was introduced in the 2019 Union Budget and came into effect from 1st September 2019. It is a new provision that applies to certain specified persons, including banks, co-operative societies and post office, and it requires them to deduct tax at source (TDS) at the rate of 0.5% on cash withdrawal exceeding Rs. 20 Lakhs in a financial year.
What is Section 194N?
Section 194N is applicable on withdrawals of more than Rs 1 crore from banks/cooperative banks/post offices during a financial year. It will apply to the withdrawal of all the sums of money or an aggregate of sums from a particular bank/cooperative bank/post office in a financial year.
When is Section 194N applicable?
Section 194N is applicable on withdrawals of more than Rs 1 crore from banks/co-operative bank/post office during a financial year. It will apply to the withdrawal of all the sums of money or an aggregate of sums from a particular bank/co-operative bank/post office in a financial year
This section is applicable to the taxpayer which includes;
- Individual
- HUF
- Company
- LLP or Partnership firm
- AOP or BOI
But apart from this, the Government has also notified that the provisions of this section do not apply to the following below-mentioned persons if payment is made to: – Government
- Banking company i.e., bank whether public or private
- Co-operative bank
- A post-office
- Business correspondents of a banking company
- White Label ATM operators of any Bank or Co-operative bank
- Specified trader or commission agents operating under the Agriculture Produce Market Committee (APMC)
- An authorized dealer or agent/sub-agent of its franchise,
- RBI licensed Full-Fledge Money Changer (FFMC) or any agent from its franchise
- Any other person may be notified by the Government of India from time to time.
How to calculate the threshold limit?
The payer shall deduct tax while making payment to any individual in cash from the individual’s bank account on the amount over Rs 1 crore.
The limit of Rs 1 crore in a financial year is with respect to per bank or post office account and not per the taxpayer’s account.
For example, if a person has three bank accounts with three different banks, he can withdraw cash of Rs 1 crore * 3 banks, i.e. Rs 3 crore without any TDS.
The cash withdrawal made by any taxpayer from the bank accounts maintained by such taxpayer (recipient) will only attract TDS under Section 194N.
For instance, if a bank makes a cash payment of more than Rs 1 crore in a FY to its account holder (i.e. any taxpayer) from the account maintained by such taxpayer, then the bank will have to deduct TDS.
In case the taxpayer issues a bearer cheque to a third party, over Rs 1 crore in a financial year, the recipient of the cash is not the account holder but a third party. In such a case, the payment is not made by the bank to the account holder.
Rate of TDS under Section 194N
The payer will have to deduct TDS at the rate of 2% on the cash payments/withdrawals of more than Rs 1 crore in a financial year under Section 194N.
Thus, in the above example, TDS would be on Rs 50,000 at 2%, i.e. Rs 1,000.
If the individual receiving the money has not filed an income tax return for three years immediately preceding the year, the tax deduction limit is reduced to Rs 20 lakh.
The TDS will be deducted at:
1) 2% on cash payments/withdrawals of more than Rs 20 lakh and up to Rs 1 crore
2) 5% for withdrawals exceeding Rs 1 crore.
