Section 194N of the Income Tax Act

Introduction

In the Union Budget of 2019, a new provision was introduced under Section 194N of the Income Tax Act. This section was introduced to simplify cash transactions and encourage digital payments. The Income Tax Act states that if a person withdraws a cash amount of more than Rs. 1 crore in a financial year, then TDS under Section 194N will be deducted at the rate of 2% on the amount withdrawn. This provision came into effect from 1st September 2019.

Here are some key insights of Section 194N of the Income Tax Act which are listed below:

1. Applicability: Tax deducted at source is applicable on cash withdrawals exceeding ₹20 lakh during a Financial Year. If ITRs have been filed for all or any one of the previous three AYs, TDS is applicable on cash withdrawals exceeding Rs. 1 crore during a Financial Year.

2. Exemptions: The TDS under Section 194N is not applicable to certain individuals and entities. These include the government, banks, co-operative societies, business correspondents of banks, white label ATM operators, and certain other entities.

3. Time of deduction: The TDS under Section 194N is to be deducted at the time of payment or credit of the cash withdrawal amount to the account of the individual or entity.

4. Reporting: The bank is required to furnish a statement of the TDS deducted under Section 194N to the individual or entity, as well as to the Income Tax Department.

5. Penalties for non-compliance: In case of non-compliance with the provisions of Section 194N, the bank may be liable to pay penalties or face prosecution under the Income Tax Act.

Who is liable to deduct TDS under Section 194N?

As per Section 194N of the Income Tax Act, any person who is responsible for paying any sum of money to a specified person will be liable to deduct the Tax Deducted at source at the rate of 2% if the withdrawal exceeds Rs. 1 crore. A specified person can be an individual, a Hindu Undivided Family (HUF), a firm, a company, or an association of persons (AOP).

The provision applies to all cash withdrawals made from banks, co-operative banks, and post offices. However, it does not apply to withdrawals made by the government, banking companies, co-operative societies that are engaged in banking, post office savings bank, and co-operative agricultural credit societies.

It is also important to note that the TDS deducted under Section 194N is non-refundable. The specified person can claim a credit for the TDS deducted while filing their income tax return.

When is TDS not applicable under Section 194N?

There are certain situations where Tax Deducted at Source(TDS) is not applicable under Section 194N of the Income Tax Act. They are as follows:

1. If the cash withdrawal does not exceed Rs. 1 crore in a financial year, then TDS will not be applicable.

2. If the specified person is a government body, then TDS will not be applicable.

3. If the specified person is a banking company, co-operative society engaged in banking, post office savings bank, or co-operative agricultural credit society, then TDS will not be applicable.

4. If the specified person is a person who is not required to obtain a PAN (Permanent Account Number) or Aadhaar, then TDS will not be applicable.

Conclusion

Section 194N of the Income Tax Act was introduced to promote digital payments and curb the use of cash. The provision requires any person who withdraws a cash amount of more than Rs. 1 crore in a financial year to have TDS deducted at the rate of 2%. The provision applies to all cash withdrawals made from banks, co-operative banks, and post offices, except for withdrawals made by government bodies, banking companies, co-operative societies engaged in banking, post office savings banks, and co-operative agricultural credit societies. The TDS deducted under Section 194N is non-refundable, and the specified person can claim a credit for the TDS deducted while filing their income tax return.