TDS on cash withdrawn from bank & Societies u/s 194N: Key feature & illustrations of how it works

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TDS on cash withdrawn from bank & Societies u/s 194N: Key feature & illustrations of how it works

With an aim to widen and deepen tax base & promoting less cash economy, FM Smt. Nirmala Sitharaman presented section 14N with following background:

  1. Mr. Speaker, Sir, our Government has taken a number of initiatives in the recent past for the promotion of digital payments and less cash economy. To promote digital payments further, I propose to take a slew of measures. To discourage the practice of making business payments in cash, I propose to levy TDS of 2% on cash withdrawal exceeding 1 crore in a year from a bank account.

TDS on cash withdrawal from banks: In order to discourage large amount of cash withdrawal from bank accounts, it is proposed to provide for tax deduction at source at the rate of 2% on cash withdrawal by a person in excess of Rs. 1 crore in a year from his bank account. Some business models, where large cash withdrawal is a necessity, are proposed to be exempted. It is also proposed that the Central Government may notify the persons to whom these provisions shall not be applicable in consultation with the Reserve Bank of India.

Clause 46 of the explanatory memorandum to the Finance Bill 2019 reads as under:

TDS on cash withdrawal under Section 194N to discourage cash transactions.

In order to further discourage cash transactions and move towards less cash economy, it is proposed to insert a new section 194N in the Act to provide for levy of TDS at the rate of two per cent on cash payments in excess of one crore rupees in aggregate made during the year, by a banking company or cooperative bank or post office, to any person from an account maintained by the recipient.

It is proposed to exempt payment made to certain recipients, such as the Government, banking company, cooperative society engaged in carrying on the business of banking, post office, banking correspondents and white label ATM operators, who are involved in the handling of substantial amounts of cash as a part of their business operation, from the application of this provision.

It is proposed to empower the Central Government to exempt other recipients, through a notification in the official Gazette in consultation with the Reserve Bank of India.

This amendment will take effect from 1st September, 2019.

 

Finance Act, 2020 has expanded the scope of provisions related to deduction of tax at source (TDS) on cash withdrawal by altogether replacing erstwhile section 194N with renewed new Section 194N. New section 194N now provides (a) different tax rates for (b) two different classes of persons. Further, it also prescribes two threshold limits. Section 194 of the Income Tax Act -1961 as amended by the Finance Act -2020 now reads as under:

 Payment of certain amounts in cash.

194N. Every person, being,—

 (i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act);

(ii) a co-operative society engaged in carrying on the business of banking; or

(iii) a post office,

who is responsible for paying any sum, being the amount or the aggregate of amounts, as the case may be, in cash exceeding one crore rupees during the previous year, to any person (herein referred to as the recipient) from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent of such sum, as income-tax:

Provided that in case of a recipient who has not filed the returns of income for all of the three assessment years relevant to the three previous years, for which the time limit of file return of income under sub-section (1) of section 139 has expired, immediately preceding the previous year in which the payment of the sum is made to him, the provision of this section shall apply with the modification that—

 (i) the sum shall be the amount or the aggregate of amounts, as the case may be, in cash exceeding twenty lakh rupees during the previous year; and

(ii) the deduction shall be—

(a) an amount equal to two per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds twenty lakh rupees during the previous year but does not exceed one crore rupees; or

(b) an amount equal to five per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds one crore rupees during the previous year:

Provided further that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the first proviso shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification:

Provided also that nothing contained in this section shall apply to any payment made to—

 (i)  the Government;

(ii)  any banking company or co-operative society engaged in carrying on the business of banking or a post office;

(iii) any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of India under the Reserve Bank of India Act, 1934 (2 of 1934);

(iv) any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 (51 of 2007):

Provided also that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the provision of this section shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification.]

 

There are lots of confusion as to the TDS u/s 194N. For ease of understanding, it is summarized as under:

  1. It is applicable only to Banks, Coop Societies carrying on the business of banking or post office and such entities are responsible for paying in cash.
  2. It is applicable to payments in cash above the threshold limit Rs 1 crore during a previous year from 1st April to 31st March. However, if the person withdrawing is not filing income tax return then the TDS would be applicable above the threshold limit of Rs. 20 Lakh. In short, bank, societies etc have to obtain the income tax return of the customers for last 3 years to apply the correct threshold and rate of TDS.
  3. As per the new section 194N, a banking company or a co-op. bank or a post office which is responsible for paying any sum, being the amount or the aggregate of amounts, in cash exceeding Rs. 1 crore during the previous year, to any person from one or more account, shall at time of payment of such sum, deduct 2% of such sum as income-tax.
  4. A proviso has been inserted to Section 194N to reduce the threshold limit for deduction of tax from Rs. 1 crore to Rs. 20 lakh if the person has not filed return of income for all the 3 preceding years. TDS rate shall be 2% from the amount withdrawn in cash if the aggregate of the amount of cash withdrawal exceeds Rs. 20 lakhs during the previous year but does not exceed one crore rupees; or (b) 5% from the amount withdrawn in cash if the aggregate of the amount of cash withdrawal exceeds Rs. 1 crore during the previous year.
  5. In my considered opinion, Issue of bearer cheque is considered as “Cash withdrawals” only and will be subject to TDS. The issue need to be further confirmed and clarified by the RBI & CBDT.
  6. The language of the provision makes it clear that TDS is applicable only if the aggregate of payments exceeds Rs 1 crore or Rs. 20 Lakh. For example, if the the aggregate payments made till 05.07.2020 was Rs 99,00,000/- and the customers withdraws Rs 2,00,000 on 06.07.2020 then the TDS would be applicable only on Rs. 1 Lakh only as payment exceeding Rs. 1 Cr would be Rs. 1 Lakh only. This example is assuming that the customer has filed income tax return for the last 3 years.
  7. The limit of Rs. 20 Lakh or 1Cr is applicable for all the accounts of the customer in a bank taken together.
  8. The necessary changes have been made to the annexures to Form 26Q and Form 27Q to enable the deductor to furnish the information of tax deducted under Section 194N or First Proviso to Section 194N. New Forms 26Q and 27Q has been amended so as include following three columns to report the details of tax deducted under Section 194N:
    (a) Amount of cash withdrawal in excess of Rs. 1 crore (in cases not covered by the first proviso to Section 194N);
    (b) Amount of cash withdrawal in excess of Rs. 20 lakhs but does not exceed Rs. 1 crore (for cases covered by sub-clause (a) of clause (ii) of first proviso to section 194N);
    (c) Amount of cash withdrawal in excess of Rs. 1 crore (for cases covered by subclause (b) of clause (ii) of first proviso to section 194N).
  9. An illustration of how the provision operates is as under:

M/s Smart Pvt Ltd withdraws from his bank the following cash on different dates:

Date of Withdrawn Cash withdrawn

 

01.07.2020 18,00,000
02.07.2020 22,00,000
03.07.2020 58,00,000
04.07.2020 22,00,000

Let us consider the TDS calculations & implications in two different scenario as under:

A] M/s Smart Pvt Ltd  is regularly filing and submitted the income tax return for the last 3 years to the bank. TDS liability in such cases would be as under:

Date of Withdrawn Cash withdrawn

 

Aggregate Amount TDS Applicable on amount Amount of TDS
01.07.2020 18,00,000 18,00,000 0 0
02.07.2020 22,00,000 40,00,000 0 0
03.07.2020 58,00,000 98,00,000 0 0
04.07.2020 22,00,000 120,00,000 On Rs. 20 Lakh only on cash withdrawals of Rs. 22 Lakh 40,000/-

A] M/s Smart Pvt Ltd has not filed and submitted the income tax return for the last 3 years to the bank. TDS liability in such cases would be as under:

Date of Withdrawn Cash withdrawn

 

Aggregate Amount TDS Applicable on amount Amount of TDS
01.07.2020 18,00,000 18,00,000 0
02.07.2020 22,00,000 40,00,000 Only on 20,00,000 out of Rs. 22 Lakh of cash withdrawn 2% of Rs. 20 Lakh = 40,000/-
03.07.2020 58,00,000 98,00,000 58,00,000 2% of 58,00,000 = 1,16,000/-
04.07.2020 22,00,000 120,00,000 22,00,000

 

 

 

a)   2% of Rs. 20 Lakh = 40,000/-
and

b)   5% of Rs. 20 Lakh = 1,00,000/

My other article on section 194N

– https://thetaxtalk.com/2019/10/15/whether-tds-required-on-cash-withdrawals-on-cash-withdrawals-by-customer-from-its-account-with-credit-co-operative-society-new-section-new-controversy-in-section-194n/

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