In the wake of demonetization, the Indian government has taken several measures to promote a cashless economy and curb the circulation of black money. Section 194N of the Income Tax Act imposes Tax Deducted at Source (TDS) on cash withdrawals exceeding a specified threshold. This section aims to discourage large cash transactions and encourage digital payments.
The government introduced Section 194N in the Union Budget 2019, and it took effect on July 1, 2020. The primary objective of this section is to levy TDS on cash withdrawals exceeding Rs 1 crore in a financial year from a single account. This provision applies to withdrawals from banks (both public and private), cooperative banks, and post offices.
The main objective of Section 194N is to discourage cash transactions and promote digital payments across India. Introduced in the Finance Act, 2019, this section aims to curb the circulation of unaccounted cash by imposing Tax Deducted at Source (TDS) on cash withdrawals beyond a specified limit. By making large cash transactions less favorable, the government encourages individuals and businesses to adopt electronic and digital modes of payment, enhancing transparency and reducing tax evasion.
Under Section 194N, banks, cooperative banks, and post offices deduct TDS when an account holder’s cash withdrawal exceeds a certain threshold in a financial year. They apply the TDS at the time of withdrawal if the amount crosses the government-set limit. This deduction is applicable to all account holders, including individuals, companies, partnerships, and HUFs, except government bodies, banks, cooperative societies, and white-label ATM operators.
The following entities are required to deduct TDS under this section:
However, certain entities and individuals are exempt from the provisions of Section 194N. These include:
The primary purpose of TDS rates under Section 194N is to monitor and regulate high-value cash transactions. It ensures that large amounts of cash do not flow unaccounted, thus preventing the use of such cash for illegal activities or tax evasion. By mandating TDS on cash withdrawals, the government encourages the shift towards digital banking, which offers better tracking and transparency. Additionally, it helps tax authorities keep a record of substantial cash transactions, making it easier to identify potential tax defaulters.
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TDS (Tax Deducted at Source) rates under Section 194N specifies different TDS on cash withdrawal, depending on whether the account holder has been filing Income Tax Returns (ITR) regularly. The purpose of varying rates is to ensure better tax compliance and to discourage large cash transactions.
For example, if an individual withdraws ₹80 lakh and hasn’t filed ITR, TDS at 2% will apply on ₹60 lakh (i.e., the amount over ₹20 lakh), which amounts to ₹1.2 lakh as TDS. If the withdrawal exceeds ₹1 crore, the excess amount over ₹1 crore would attract TDS at 5%.
The government structures these rates to discourage the use of cash for large-scale transactions, making it less convenient for individuals relying on unaccounted cash dealings. Additionally, by imposing stricter TDS rates on those who do not file tax returns, the government aims to increase tax compliance. It ensures that regular taxpayers have more favorable conditions for their withdrawals while pushing non-compliant individuals or entities to be more transparent with their financial activities.
The following amendments were made to Section 194N effective from July 1, 2020:
To claim a reduced TDS deduction under Section 194N, certain conditions must be met:
The key objective of Section 194N is to curb large cash withdrawals made by users from bank accounts, thereby reducing the circulation of black money in the economy. By imposing TDS on such withdrawals, the government aims to track large cash transactions and encourage individuals and businesses to move towards digital payments.
Section 194N plays a crucial role in India’s push towards a cashless economy by imposing TDS on large cash withdrawals. It aims to discourage cash transactions and promote digital payments, thereby reducing the circulation of unaccounted money. Both individuals and businesses must be aware of the TDS implications under this section to avoid penalties and ensure compliance with the tax laws.
Section 194N was introduced to discourage large cash withdrawals and promote digital transactions. It imposes TDS on cash withdrawal U S 194N in excess of Rs 1 crore in a financial year.
The responsibility of deducting TDS under Section 194N lies with the bank, cooperative bank, or post office making the cash payment.
Yes, certain entities such as government bodies, banking companies, corporate correspondents, and white-label ATM operators are exempt from the provisions of Section 194N.
If ITRs have been filed for the last three years, TDS is deducted at 2% on withdrawals exceeding Rs 1 crore. If ITRs have not been filed, TDS is deducted at 2% on withdrawals exceeding Rs 20 lakh and at 5% on withdrawals exceeding of Rs 1 crore.
Yes, reduced TDS can be claimed if the conditions specified in the section are met, including timely filing of ITRs for the last three financial years.
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