To achieve the cashless economy blueprint, the BJP-led government regularly introduces reforms to the laws. The constitution included Section 194N, another step towards digital payments and eliminating cash transactions. This section focuses on the imposition of TDS on cash withdrawals exceeding thresholds.
This article highlights the reasons behind bringing this act, who will have to pay TDS, who will deduct it, the rates of TDS and much more.
Did You Know?
Section 194N was applied to the payments made since 1 September 2019. However, the maximum limit is ₹1 crore for applying to the cash withdrawals/payments made during FY 2019-20.
What is Section 194N?
Nirmala Sitharaman, Finance Minister, presented her first Union Budget (July 5, 2019). She included new Section 194N to the 1961 Income Tax Act. Individuals will be able to take advantage of various benefits and schemes in the Union Budget 2019.
These include 80EEA and 80EEB. Union Budget 2019 also introduced Section 194N to allow deducting tax at source (TDS) on cash withdrawals exceeding ₹1 crore to encourage digital payments. Section 194N applies to payments made after September 1, 2019.
These are the highlights of Section 194N:
- Section 194N applies to cash withdrawals exceeding ₹1 crore for the financial years from April 1 through March 31.
- TDS does not apply when the account holder asks the banks to issue a cashable check or draft at a different time or location. This section does not include bearer cheques.
- Every bank must now keep track of all cash payments exceeding ₹1 crore in the past year, as this section was introduced.
- The limit of ₹1 crore will apply to each account if the entity has both a Current Account and an overdraft Account. The limit applies to all accounts, even if more than one account is used for cash payments by banks.
- TDS will not apply if the recipient and account holders differ. Cash payments are made through bearer cheques.
How to Calculate the Threshold Limit?
The threshold limit of ₹1 Crore applies to all types of bank accounts. It is calculated by taking the sum of the cash withdrawals in a single year from all bank accounts. This threshold limit applies to cash withdrawals from both the joint account and the separate accounts.
Under this limit, the bank should have attuned software to detect cash withdrawals from joint accounts. The threshold limit can apply to an individual, a couple, or a business.
TDS will apply to cash payments made from banks, cooperative banks, post offices, or other banks to individuals out of the recipient's account. Other measures can reduce cash transactions, but these are still in the early stages.
Why is Section 194N Introduced?
- This section will prevent large cash withdrawals from taking place. Digital payments and transactions will not be allowed.
- The Tax Department can access large cash transaction data and further investigate the matter.
- The public will stop using traditional transaction methods because they are expensive and can lead to TDS liabilities.
Who Will Deduct TDS Under Section 194N?
The payer should deduct TDS when the cash payment exceeds ₹1 crore per financial year. The payer must deduct TDS from any money withdrawn by the payee at regular intervals.
New Section 194R states that any person providing perks or benefits to residents for their business or profession should deduct TDS at 10%.
TDS is deducted from the following types of payments:
- Consultation fees
- Commission payments
- Banks pay interest
- Rent payments
- Professional fees
TDS will be deducted by Section 194N of the Income Tax Act from the cash payment made by the payer. Here's a list of such people:
- Any bank, public or private.
- A cooperative bank
- A post office
Certain categories of people (payees) are exempt from the provisions of this section. These are the following:
- Any government agency
- Any bank, cooperative or not
- Any bank company's business correspondent (including cooperative banks).
- Any white-label ATM operator at any bank (including cooperative banks).
- The Traders of APMC pay the farmers.
- Any other person notified by the Government
What Is the Point of TDS Under Section 194N of the Income Tax Act?
The payer should deduct TDS when the cash payment exceeds ₹1 crore per financial year. Once the sum withheld exceeds ₹1 crore in a financial calendar year, the payer must deduct TDS.
Additional taxes will be added to any amount exceeding ₹1 crore.
If a person withdraws ₹95 lacs during a financial year and then withdraws ₹65 lacs the next time, the TDS liability will only be on the ₹65 lacs excess. This is because ₹65 lacs is the amount over ₹1 crore. The person will need to pay 2% of ₹65 lacs, which will be ₹1,30,000.
Rate of TDS Under Section 194N
(i) TDS will be deducted from the number of ₹1 crore withdrawn by an individual who has filed an income tax return in the 3 years immediately before the year.
(ii) An individual receiving the money must not have filed an income tax return within the three-year period for which the time limit for filing returns of income under Section 13(1) has expired. The TDS is 2% for cash payments/withdrawals exceeding ₹20 lacs to ₹1 crore. Withdrawals exceeding ₹1 crore are subject to a 5% TDS.
How Does 194N Apply to Joint Accounts?
This is a grey area that could have multiple views. Let's take an example. Husband and wife have separate accounts at a Bank. They also have a joint bank account. They have taken out up to ₹92 lakhs in cash from their individual accounts. The husband now wants to withdraw ₹11 lakhs in cash from their joint bank account.
One might argue that 50% of cash withdrawals should be attributed to the husband. TDS may not be necessary for this instance, but it may be possible. No matter how much money. If either spouse withdraws ₹11 lakhs cash, it should be considered a breach.
The limit should be considered breached because both the husband and wife are responsible for operating the account. The bank will count all accounts that have been maintained. The banking software must be able to detect cash withdrawals exceeding the threshold. This can be done by considering cash withdrawals in all accounts.
Other Features of the Section
The following are additional requirements in Section 194N, which is a section of the Income Tax Act.
- Section 194N applies to cash payments which exceed ₹1 Crore in an earlier year, beginning from the April 1 of one particular year until March 31 of the next year.
- Section 194N is now bringing an obligation for banks and other similar entities to keep track of every cash-based payment greater than ₹1 crore in the previous year.
- The banks and other entities mentioned in the section generally accept payments in cash on an instrument, namely cheques. Account-holders typically issue cheques. It is important to note it is not a requirement to use TDS when a holder of an account wants a banker's draft or bankers' cheque that is cashable at another location or at a different time. Simply put, the bearer cheque issued by the bank is not within the umbrella of "cash" in this section's meaning.
- This limit is ₹1 crore, applicable to each account maintained at the institution or comparable organisations. For example, if an entity has an Overdraft Account or Current Account, the limit of ₹1 Crore applies to both accounts. If the company manages more than one account, banks can make cash transactions, and the limit applies to all of the accounts. In addition, if the business has branches across the country and has distinct accounts at each location, then the limit applies to all branches without regard to the particular account holder's identity having the same account.
- The provisions of Section 194N in the Income Tax Act also state that the deduction can be claimed through income Tax.
- The section discusses the instances that fall under the category exempted from payments. This includes payments made towards government agencies, Banks, Cooperative Societies, the Government and Post Offices. That means that anyone who makes payments to these entities is not subject to TDS deduction regardless of the amount taken out in cash.
- The law stipulates that TDS will apply when a bank account holder withdraws over ₹10 lakhs in cash. So, even though the recipient is the term used in this context, the account owner directs the bank to make a cash transfer for the beneficiary. A recipient need not always represent the account owner. If the recipient and account holder aren't identical and the cash payment is made through bearer cheques, TDS is not tax-deductible.
If the taxpayer has not filed an ITR within 3 years of the year, then the TDS will apply above ₹20 lakhs above ₹1 crore at 2% and ₹1 crore at 5%. The limit for taxpayers who have filed ITR in the last 3 years will be ₹1 crore, and TDS will increase to 2% if the taxpayer has not filed it for any of the preceding financial years. TDS will apply only to the excess amount and not the entire amount as per Section 194N. Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.