In order to promote digital transaction and discourage cash transaction, the government had introduced Tax Deduction at source on cash withdrawal by any person from Bank registered under the Banking Regulation Act, Co-operative society engaged in the business of banking or a post office. The above-mentioned provision was inserted under section 194 N of Income Tax Act 1961.
What was the scenario prior to the introduction of this section?
If a person holds multiple accounts with one bank and withdraws cash during a year of any amount, then there was no such concept of tax deduction at source or withholding tax.
For example – if Mr. X held three bank accounts with State Bank of India in different branches, and he withdrew cash during the financial year 2018-19 aggregating to Rs. 1.20 crores, then, in this case, there was no Tax Deduction at Source (TDS) on the cash withdrawn.
What was the scenario post introduction of this section in 2019-20?
If any person (Account Holder) withdraws any amount from a bank registered under the Banking Regulation Act or co-operative society engaged in banking business or post office, in excess of Rs. 1 crore, then for the excess amount such bank/co-op soc/post office will deduct TDS @ 2 per cent.
Going by the example above– If Mr. X held three bank accounts with State Bank of India in different branches, and he withdrew cash during the financial year 2019-20 aggregating to Rs. 1.20 crores, then, in this case, TDS amounting to Rs. 40,000/- (2 per cent on the excess of Rs. 0.2 Crores) will be deducted by the bank while handing over the cash to Mr. X. The reason being, Mr. X withdrew cash above Rs 1 crore during the year, and any amount over Rs 1 crore, TDS under section 194 N will be applicable, and bank will be liable to deduct TDS @ 2 per cent and handover the same to account holder withdrawing the money.
However, an important point to be noted here is that the limit is bank-wise. For example, if you withdrew Rs. 80 Lakhs from SBI and Balance Rs. 40 Lakhs from some other bank, say “Indian Bank” then, in that case, there won’t be any TDS, as the limit is bank-specific. Like-wise it is co-operative specific and post office-specific.
What is the amendment or update of this section for FY 2020-21?
In Finance Act 2020, two provisos (conditions) were inserted in this section. The first being the government has lowered the limit to Rs. 20 Lakhs instead of 1 crore for those persons who have not filed their income tax return for three preceding Previous Year before their dues date of filing the income tax return, immediately before the current Previous Year.
This means that, if in 2020-21 you withdraw cash above Rs. 20 Lakhs and have not filed your income tax return for three preceding previous years (2019-20, 2018-19, 2017-18) before their due date of filing the income tax return, then the limit of TDS for them is Rs. 20 Lakhs and not one crore.
The rate of tax is 2 per cent for cash withdrawal above Rs. 20 Lakhs but less than Rs. 1 crore and 5 per cent for cash withdrawal above Rs. 1 crore. The table below will give a fair understanding:
Withdrawal > 20 LAKHS
Withdrawal > 1 CRORE
Income Tax Return for 3 previous year filed before due date
Income Tax Return for 3 previous year not filed or either of one filed after due date
In short, if you are a person who filed your income tax return on or before due dates of three preceding previous years, then the newly introduced proviso or you can say condition will not apply to you. Moreover, what was there in FY 2019-20, the same proviso will apply to you. That means the limit is set at Rs. 1 Crore.
The other proviso inserted is “The Central Government in consultation with Reserve Bank of India through Official Gazette will specify to whom this Rs. 20 Lakhs limit will apply / not apply”.
Frequently Asked Question:
Why is the provision applicable from July 1, 2020?
The reason for making it applicable from this date is to give some time to banks / co-operative society & post office to update their software.
What will be the rate of TDS if in case a person does not hold PAN or is not required to hold one?
There is no specific answer to this in the section, the assumption is that TDS will be deducted at 2 per cent / 5 per cent only.
Can we obtain Lower Deduction Certificate for this section?
No, Lower deduction certificate cannot be applied or issued for TDS under section 194 N.
Can the person take credit for Tax deducted by the bank?
Yes, Credit can be taken for TDS on cash withdrawal.
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