Section 194N of Income Tax Act

In order to discourage cash usage and promote digital payments, Finance Minister Nirmala Sitharaman introduced Section 194N in the Union Budget 2019. 

Section 194N is applicable in case of cash withdrawals of more than Rs 1 crore during a financial year & will apply to all the sum of money or an aggregate of sums withdrawn from a particular payer in a financial year.

This section was introduced with the purpose of eliminating large cash withdrawals from bank accounts and phasing out black money from India.

WHO WILL DEDUCT TDS UNDER SECTION 194N ?

As per Section 194N of the Income Tax Act, every person making cash payment in excess of Rs. 1 crore in a FY to a recipient has to deduct TDS at the rate of 2%. This includes –

  • Any bank (private or public sector)
  • A co-operative bank
  • A post office

The tax will be deducted by the payer while making payment to any individual in cash from a taxpayer’s bank account on the amount in excess of Rs 1 crore. 

***The limit of Rs 1 crore in a financial year is with respect to per bank or post office account and not a taxpayer’s individual account.

However, the provision of this section is not applicable to the following category of persons-

  • Any government body
  • Any bank including co-operative banks
  • Any business correspondent of a banking company (including co-operative banks)
  • Any white label ATM operator of any bank (including co-operative banks)
  • Any other person notified by the government

APPLICABILITY OF SECTION 194N

TDS Deduction under section 194N is applicable to all taxpayers, including-

  • An Individual
  • A Hindu Undivided Family (HUF)
  • A Company
  • A partnership firm or an LLP
  • A local authority
  • An Association of Person (AOPs) or Body of Individuals (BOIs)

LATEST CHANGES MADE UNDER SECTION 194N

The changes done in the section 194N from the FY 2020-21 to be applicable from 1st July 2020 are as follow-

  1. If the assessee hasn’t filed the income tax return for the previous 3 financial years the TDS rate will be deducted at the rate of 2% on the amount between INR 20 lakh to 1 crore withdrawn while 5% applicable on the amount exceeding the INR 1 crore of the FY.
  2. If the assessee has filed the income tax return for the given year, there is no TDS deduction applicable however there will be a 2% TDS deduction on the amount above 1 crore .

POINT OF TAX DEDUCTION –

TDS will be deducted by the payer while making the cash payment over and above Rs 1 crore in a financial year to the payee. If the payee withdraws a sum of money on regular intervals, the payer will have to deduct TDS from the amount, once the total sum withdrawn exceeds Rs 1 crore in a financial year. 

Further, the TDS will be done on the amount exceeding Rs 1 crore. For example, if a person withdraws Rs 99 lakh in the aggregate in the financial year and in the next withdrawal, an amount of Rs 1,50,000 is withdrawn, the TDS liability is only on the excess amount of Rs 50,000.

 

The provisions of Section 194N will be applied to the payments made on or after 1 September 2019.

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