All about TDS under section 194N
Section 194N of the Income Tax Act, 1961, introduced in 2019 and amended subsequently, governs the tax deduction at source (TDS) on cash withdrawals exceeding specified limits. It reflects India’s push toward a digital economy and aims to discourage large cash transactions. Below, I’ll break down its provisions, highlight related rules, and provide context.
Key Provisions of Section 194N
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Applicability of Section 194N
The section applies to entities responsible for paying cash:
- Banking companies (as per the Banking Regulation Act, 1949).
- Cooperative societies engaged in banking.
- Post offices.
These entities must deduct TDS when cash withdrawals exceed certain thresholds from accounts maintained with them.
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Standard Threshold and Rate
- Threshold: ₹1 crore in aggregate cash withdrawals during a financial year (April 1 to March 31).
- TDS Rate: 2% on the amount exceeding ₹1 crore.
- Example: If you withdraw ₹1.2 crore in a year, TDS = 2% of ₹20 lakh = ₹40,000.
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Special Provisions for Non-Filers of ITR
For recipients who haven’t filed income tax returns (ITR) for the three previous years (where the filing deadline under Section 139(1) has expired), stricter rules apply:
- Threshold: Reduced to ₹20 lakh.
- TDS Rates:
- 2% on amounts exceeding ₹20 lakh but up to ₹1 crore.
- 5% on amounts exceeding ₹1 crore.
- Example: If a non-filer withdraws ₹1.5 crore:
- ₹20 lakh exempt.
- ₹80 lakh (₹20 lakh to ₹1 crore) at 2% = ₹1.6 lakh.
- ₹50 lakh (above ₹1 crore) at 5% = ₹2.5 lakh.
- Total TDS = ₹4.1 lakh.
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Special Threshold for Cooperative Societies 194N
- Inserted by the Finance Act, 2023 (effective April 1, 2023), the threshold for cooperative societies as recipients is raised to ₹3 crore instead of ₹1 crore.
- TDS applies at 2% on amounts exceeding ₹3 crore.
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Exemptions from Section 194N
No TDS applies to payments made to:
- Government entities.
- Banks, cooperative societies engaged in banking, or post offices.
- Business correspondents of banks/cooperative societies (per RBI guidelines).
- White Label ATM operators (per the Payment and Settlement Systems Act, 2007).
- Other recipients specified by the Central Government in consultation with the Reserve Bank of India (RBI) via notification.
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Government’s Discretionary Power
- The Central Government, with RBI consultation, can:
- Exempt certain recipients or reduce TDS rates via notifications.
- Tailor the provision’s applicability based on economic or compliance needs.
- The Central Government, with RBI consultation, can:
Summary of the threshold and tds rate u/s 194N
| Category of Recipient | Condition Regarding Filing of Income Tax Returns for the Preceding 3 Years | Threshold Amount for Aggregate Cash Withdrawal During the Previous Year | TDS Rate |
|---|---|---|---|
| All Persons (Except Co-operative Societies) | Returns filed for all 3 preceding assessment years within the due date of Section 139(1) | Up to ₹1 Crore | Nil |
| All Persons (Except Co-operative Societies) | Returns filed for all 3 preceding assessment years within the due date of Section 139(1) | Above ₹1 Crore | 2% on the amount exceeding ₹1 Crore |
| Recipients who have NOT filed ITR for ALL 3 preceding AYs | Returns NOT filed for all 3 preceding assessment years within the due date of Section 139(1) | Above ₹20 Lakhs up to ₹1 Crore | 2% on the amount exceeding ₹20 Lakhs |
| Recipients who have NOT filed ITR for ALL 3 preceding AYs | Returns NOT filed for all 3 preceding assessment years within the due date of Section 139(1) | Above ₹1 Crore | 5% on the entire amount exceeding ₹1 Crore |
| Co-operative Societies (Regardless of Filing Status) | Any Filing Status | Up to ₹3 Crore | Nil |
| Co-operative Societies (Regardless of Filing Status) | Any Filing Status | Above ₹3 Crore | 2% on the amount exceeding ₹3 Crore |
