Section 194N of the Income Tax Act

What is Section 194N?

Section 194N of the Income Tax Act requires banks, post offices, and cooperative societies to deduct TDS on large cash withdrawals. If you withdraw more than ₹1 crore in a financial year, 2% TDS is deducted. If you haven’t filed income tax returns for the last three years, TDS applies on withdrawals above ₹20 lakh—2% for amounts over ₹20 lakh and 5% beyond ₹1 crore. This rule helps reduce cash transactions and encourages digital payments.

To understand the tax impact of your withdrawals under Section 194N, you can use an Income Tax Calculator to estimate liabilities effectively.

Applicability of Section 194N

The provision applies to any taxpayer, including:

• Individuals

• Hindu Undivided Families (HUFs)

• Companies

• Partnership Firms or LLPs

• Associations of Persons (AOPs)

• Bodies of Individuals (BOIs)

The taxpayers pay TDS under Section 194N if withdrawing cash from:

• Banks (private, public, or cooperative)

• Post offices

• Payments made via cheque or cash counters

Exceptions:

The section does not apply to:

• Government bodies and statutory authorities.

• Banking companies, cooperative banks, or business correspondents.

• Post Offices.

• Business Correspondents of a banking company.

• White Label ATM Operators.

• Specified Traders or Commission Agents operating under the Agriculture Produce Market Committee (APMC) (Notification No. 70/2019, dated 20th Sept 2019).

• Authorized Dealers, Agents, or Franchisees.

• Full-Fledged Money Changers (FFMCs) licensed by RBI or their agents, subject to conditions (Notification No. 80/2019, dated 15th Oct 2019).

• Any Other Person notified by the Government of India.

Threshold Limits for TDS Deduction

The amount of TDS depends on the total cash withdrawal from one or multiple accounts during a financial year.

Practical Examples of TDS under Section 194N

Example 1: Frequent Cash Withdrawals by a Business

• ABC Traders withdraw ₹1.2 crore from their current account during a financial year.

• TDS Calculation:

  • Amount over ₹1 crore = ₹20 lakh

  • TDS = 2% of ₹20 lakh = ₹40,000

  • The bank deducts ₹40,000 as TDS and deposits it with the government.

Example 2: Individual Not Filing ITR in Previous 3 Years

• Mr Raj has not filed an ITR for the last three years. He withdraws ₹50 lakh in cash during the financial year.

• TDS Calculation:

  • Withdrawal above ₹20 lakh = ₹30 lakh

  • TDS = 2% of ₹30 lakh = ₹60,000

  • Bank deducts ₹60,000 from his withdrawals and reports it to the income tax department.

Who Will Deduct TDS Under Section 194N?

• Banks, cooperative banks, and post offices are responsible for deducting TDS on cash withdrawals if the total amount crosses the specified threshold in a financial year.

• TDS is deducted at the time of payment and deposited with the government.

Why Was Section 194N Introduced?

The key objective of this section is to:

• Discourage large cash transactions and encourage digital payments.

• Curb tax evasion by monitoring high-value cash withdrawals.

• Ensure better tax compliance by applying higher TDS on those not filing returns regularly.

Key Impact of Section 194N

The Section 194N impacts the taxpayers in the following ways:

• Discourages large cash transactions – This section encourages people to adopt cashless modes of payment.

• Better tax compliance – Higher TDS rates apply to those who have not filed ITRs, prompting regular tax filings.

• Enhanced monitoring – It helps the government track the movement of unaccounted cash and curb money laundering activities.

• Encouraging Digital Transactions: Promotes cashless payments by discouraging large cash transactions.

Important Points to Note

• Cumulative Withdrawals: The threshold is calculated on all accounts held by the individual within a bank.

• No Refund of TDS on Withdrawal: Once deducted, the TDS cannot be refunded by the bank even if the cash is not used.

• Adjustment Against Final Tax Liability: The TDS amount is credited to the individual’s tax account and can be adjusted when filing their income tax return.

Conclusion

Section 194N ensures transparency in high-value cash transactions and promotes digital payments in India. By applying TDS on substantial cash withdrawals, the government reduces the risk of unaccounted cash circulating in the economy. It also incentivizes people to file their tax returns regularly to avoid higher tax deductions.