Income Tax

Section 194N – A Complete Overview of Newly Introduced Section

Finance Minister Nirmala Sitharaman presented her first Union Budget on 5^th July 2019 and added new Section 194N in the present Income Tax Act, 1961. The Union Budget of 2019 has introduced various schemes and benefits for individuals such as 80EEA and 80EEB. Similarly, in order to encourage digital payments and discourage transactions carried in cash, Union Budget 2019 has introduced Section 194N for deducting tax at source (TDS) on cash withdrawal more than INR 1 Crore. The provisions of Section 194N will be applicable to the payments made on or after 1^st September 2019.

About Section 194N

Section 194N of Income Tax Act, 1961^[1] is applicable on every cash withdrawal made in a financial year exceeding INR 1 Crore. This section is applicable on all the sum of money or aggregate of sums withdrawn from a particular taxpayer in a financial year.

This section is applicable to the withdrawals of the following taxpayers:

• An Individual
• Hindu Undivided Family (HUF)
• Company
• Partnership Firm
• LLP
• Local Authority
• Associations of persons
• Body of Individual

While making the payment to following taxpayers in excess of INR 1 Crore, the payer will deduct tax from the taxpayer’s bank account at the time of making payment.

Payers Who Can Deduct TDS

The following payers who are making payment in cash will have to deduct TDS under this section:

• Any Bank (Private Sector or Public Sector)
• Co-operative Bank
• Post Office

The limit fixed of INR 1 Crore in a financial year with respect to per Bank Account or Post Office Account and not a taxpayer’s individual account. If an individual had a total of 2 different bank account in two different banks, he can withdraw cash in a financial year up to INR 2 Crore without TDS.

If an account is maintained by the taxpayer in a Bank from which an individual is withdrawing cash, only then such Bank will deduct TDS under section 194N. If a Bank makes a cash payment to an individual taxpayer of more than INR 1 Crore in any financial year, from the account maintained by such recipient, then the bank will deduct TDS. Payment is not made by the Bank to the account holder in case of payment made through a bearer cheque issued to the third party, and the recipient of cash is not the account holder, instead, it’s a third party.

Exemption

There are certain persons on whom the provisions of this section do not apply:

• Any Government Body
• Any co-operative society engaged in carrying the banking business.
• Business Correspondent of a banking company
• A Post Office
• White label ATM operator of any banks.
• Any person as notified by Government.

Overview of Section 194N

• Section 194N is applicable on every cash withdrawal made in excess of INR 1 Crore for the financial year beginning from 1^st April to 31^st March.
• It has to be noted that TDS is not applicable when the account holder requests the respective banks to issue a cheque or draft which is cashable at different location or time. Bearer cheque does not fall in the category of cash as per this section.
• With the introduction of this section, it is necessary for every bank to maintain now the entry of every payment made in cash exceeding INR 1 Crore in the previous year
  
• If any entity has both Current Account and an Overdraft Account, then the limit of INR 1 Crore will be applicable on each account. Also if the taxpayer maintains more than one account from which cash payment can be made by a bank, the limit of this section is applicable to all the accounts.
  
• TDS won’t be applicable in case the recipient and account holders are not the same person, and cash payment is through bearer cheque.

Rate of TDS Deduction

In order to move towards the aim of a cashless economy and discourage the transactions and payments carried through cash, a proposal of this scheme is introduced in Union Budget 2019. TDS will be levied at the rate of 2 percent on cash payments made by the banks, post office, cooperative banks or a banking company to an individual from the account which is maintained by the recipient. With this, there are also various measures to curb cash transactions but they are still at debatable stages. For instance, businesses are not allowed to make cash expenses exceeding INR 10,000.

Effects of the Introduction Of Section 194N

The introduction of this provision seemed to have a large-cap for cash withdrawals of INR 1 Crore. But also the provisions will affect the liquidity of manufacturing industries. These industries work with a huge amount of working capital needs for carrying their day to day transactions. A huge amount of cash will be held by the banks due to the deduction of TDS on every cash withdrawal over and above INR 1 Crore. As per the Income Tax provisions, a tax which is deducted as a TDS under this section shall be treated as tax paid by the payee on its income. Thus the payee can avail tax credit while filing his own Income Tax Return. But, any cash withdrawal from the bank account is not treated as Income.

Frequently Asked Questions

• Why Introduction of Section 194N?

Government of India has introduced section 194N in the Union Budget 2019 proposed on the 5^th day of July, 2019 in order to discourage cash transactions and promote digital payments instead. Applicability of TDS deduction is for cash withdrawal above INR 1 Crore.

• How TDS is levied under this section?

In case the payee keeps on withdrawing sum from his account at regular intervals , TDS is levied only when the aggregate of such sum exceeds INR 1 Crore. For example: if an individual withdraws INR 99 Lakhs and then withdraw INR 150000, in that case, TDS will be levied at the rate of 2 percent only on the excess amount of  INR 50000.

• How the the cash withdrawal from a bank treated?

The Bank is only returning the money to an individual from his own account. Clearly, banks cannot treat cash withdrawals as income.