TDS on Cash Withdrawal

• Taxation
• ||
• August 21, 2020

The government of India with an objective to discourage cash transactions and promote the digital economy, introduced Section 194N to the Income-tax Act, 1961 through the Finance Act, 2019 which comprises TDS on payment of certain amounts in cash. Section 194N proposed on 5^th July 2019 and the deduction of tax under the section has been made effective on cash withdrawals more than Rs. 1 crore from 1st September 2019 followed by modification in the Finance Act 2020 made effective from 1^st July 2020.

Statutory Provision for TDS on cash withdrawal
Applicability of Section 194N in circumstances where cash withdrawals of more than Rs. 1 crore are made during a financial year. This section applies to all the sum of money withdrawn from a specific payer in a financial year. Furthermore, for calculating the limit of Rs. 1 crore, limit all the accounts held by a person with one bank are to be considered.

Applicability
Every following person is required to deduct TDS @2% who is responsible for paying any sum in cash of aggregate Rs. 1 crore during the financial year:

• A Banking Company (Private or Public Sector).
• A Co-operative Bank.
• A Post Office.

The section applies to withdrawals made in excess of Rs. 1 crore by a person as:

• An Individual or a Hindu Undivided Family (HUF).
• A Company, a Partnership Firm, or an LLP.
• A Local Authority, an Association of Person (AOP), or a Body of Individuals (BOI).

The threshold limit of Rs. 1 crore is concerned per bank or post office account and not the person’s account held with it. For instance, if a person has 4 bank accounts with four different banks, then he can withdraw cash of Rs. 4 crore × 4 = Rs. 4 crores without any deduction of tax. Further, it should be noted that the payments which fall under the ambit of Section 40(a)(3) shall not come under the purview of Section 194N.

Rate of TDS
The persons to whom Section 194N is applicable is required to deduct TDS @ rate of 2% on the cash withdrawals of more than Rs. 1 crore during the financial year.

Finance Act, 2020 also modifies section 194 by lowering the limit of Rs. 1 crore to Rs. 20 lakhs for an individual who has not filed his Income Tax return for the three years immediately preceding to the Financial year. In that case, TDS will deduct @2% on cash withdrawals from Rs. 20 lakhs to Rs. 1 crore and 5% for above 1 crore. Such modification will be made effective from 1^st July 2020.

Non-applicability
The provisions of section 194N do not apply where the paying any sum of money in cash by the person is made to any of the following persons:

• Government
• A Banking Company or post office.
• A Co-operative Society engaged in the business of banking.
• Any business correspondent authorized by RBI.
• Any white label automated teller machine operator authorized issued by RBI.
• Any other person notified by the central government through a notification.

Time of deduction of tax
The tax under section 194N will be deducted by the payer at the time of making the cash payment exceeding ₹ 1 crore in a financial year to the payee. If the payee withdraws money regularly, the payer has to deduct tax once the total sum is withdrawn exceeds ₹ 1 crore in a financial year and TDS will be deducted on the excess value only.

The clarification has also been made by the CBDT after the consideration of the people that  for calculating the exhausted limited of 1 crore, it shall be counted from the cash withdrawals made after 1st April 2019 but the amount will be subject to TDS only on the cash withdrawal after 1st September 2019. In nutshell, if a person has already withdrawn Rs. 1 crore or more in cash up to 31st August 2019 from one or more accounts maintained with a banking company or a cooperative bank or a post office, the two percent TDS shall apply on all subsequent cash withdrawals.

Illustrations for calculation of TDS

Illustration 1: XYZ ltd has made cash withdrawal of Rs. 1.5 crore on 30^th April 2019 from XYZ Bank. 

Solution: No tax will be deducted because the cash was withdrawn before 1st September, 2019. 

Illustration 2: XYZ Ltd. made following cash withdrawals from Dena Bank during the FY 2019-20:

1. Rs. 85 lac on 20th Aug, 2019 and
2. Rs. 30 lac on 2nd Sept., 2019.

Solution: Now, two individual calculations would be made in this case:
Firstly for checking the applicability of section 194N, we need to calculate of threshold limit ₹ 1crore considering all the withdrawals made from one bank during year 2019-20.

Total cash withdrawal: Rs. 85 lac + Rs. 30 lac = Rs. 1.15 crore

Hence, Section 194N is applicable in this case.

Secondly, calculation of tax to be deducted at Source:

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