In recent years, the Indian government has implemented measures to discourage cash transactions and promote digital payments. One of these measures is Section 194N of the Income Tax Act, which mandates tax deduction at source (TDS) on cash withdrawals above certain limits. This provision was introduced to curb black money and improve tax compliance by tracking significant cash withdrawals.
Who is Liable to Deduct TDS under Section 194N?
Under Section 194N, TDS applies to cash withdrawals by any individual or entity from a bank, cooperative society, or post office. The TDS deduction is mandated when the total cash withdrawal exceeds certain thresholds within a financial year. Banks and financial institutions, as defined by the Banking Regulation Act of 1949, are required to deduct TDS under this section.
The provision specifically applies to:
- Banks (both public and private).
- Cooperative banks.
- Post offices.
This section does not apply to the government, certain banking companies, cooperative societies engaged in agriculture, or any other person notified by the government.
Key Provisions and Thresholds of Section 194N
Section 194N stipulates that TDS should be deducted on cash withdrawals if they exceed specified limits. Here’s a breakdown of the TDS rates and limits under different scenarios:
- For cash withdrawals exceeding Rs. 20 lakh but not exceeding Rs. 1 crore (for individuals who have not filed income tax returns for the last three assessment years):
A TDS of 2% is applicable on the amount exceeding Rs. 20 lakh.
- For cash withdrawals exceeding Rs. 1 crore:
A TDS of 5% is applicable on the amount exceeding Rs. 1 crore.
These thresholds ensure that significant cash transactions are monitored and regulated, encouraging individuals and businesses to adopt digital modes of payment.
Exceptions to Section 194N
The Third Proviso of Section 194N provides certain exceptions. For instance, if the recipient of cash is a cooperative society, the above limits and TDS rates may not apply. This exception acknowledges the operational needs of cooperative societies, which often deal with rural and unbanked populations where digital payment options might not be feasible.