Conditions for Applying Section 194N

Section 194N is applicable when cash is withdrawn from Any scheduled bank, A Co-operative bank and A Post office. TDS is deducted by the bank/post office at the time of cash withdrawal when the total amount during the financial year exceeds the limit. It applies to withdrawals through self cheques, Bearer cheques, ATM, Counter withdrawal. However, Digital withdrawals and transfers do not attract TDS.

Exemptions Under Section 194N

No TDS will be deducted when cash withdrawal is made by the Central or State Government, Banks, Co–operative banks and post offices, Business correspondents of banks, White label ATM operators, Any person or class of person notified by the Government, or Certain commission agents or traders withdrawing cash on behalf of farmers.

TDS Rates under Section 194N

TDS rates under Section 194N depend on whether the taxpayer has filed Income Tax Return for the preceding three assessment years.

1. If a person has filed their Income Tax Return (ITR) for any of the last three years, they can withdraw up to Rs 1 crore in cash in a financial year without any TDS being deducted. If their total cash withdrawal goes beyond Rs 1 crore, then the bank will deduct 2% TDS on the amount that exceeds Rs 1 crore.

2. If someone hasn’t filed their income-tax returns for the last three years, then a higher TDS applies on large cash withdrawals from the bank. This means the bank will cut 2% TDS if the person withdraws more than Rs 20 lakh and up to Rs 1 crore in a year. If the person withdraws more than Rs 2 crore, then the TDS rate increases to 5%.

How Banks Calculate TDS

Here’s how bank calculate TDS:

• Banks keep track of how much cash you withdraw from all your accounts combined.
• If your cash withdrawals go above the allowed limit, the bank will automatically cut TDS.
• Your PAN number helps the bank check whether you file Income Tax Returns (ITR) or not.
• Sometimes, banks may ask you to declare if you file ITR, so they know which TDS limit applies to you.
• Whatever TDS the bank deducts will show up in your Form 26AS or AIS, and you can claim this TDS back while filing your ITR (if eligible).

Mistakes to Avoid

Following are some common mistakes which you must avoid.

• People often think each account gets an Rs 1 crore limit, but actually the limit is per bank, not per account.
• Some think TDS is cut only at the end of the year, but it is cut as soon as your withdrawals cross the limit.
• Many get confused about whether they are ITR filers or non-filers, which affects the TDS rate.
• People forget to track cash withdrawals from different branches of the same bank but they all count together.
• Some think TDS is money lost but it’s not a loss. You can adjust it or get it refunded in your ITR.

Major Compliance Points for Professionals

Following are some major points which professionals must be aware of:

• Make sure the client’s ITR is filed on time; otherwise, the bank will cut higher TDS.
• For businesses that use a lot of cash, it’s good to plan the year’s cash withdrawals in advance.
• Keep an eye on cash withdrawn from all accounts within the same bank.
• Check the TDS deducted under Section 194N in Form 26AS or AIS to confirm it’s correct.
• Keep proper records and documents, especially for businesses that withdraw large amounts of cash.
• Explain to clients that TDS is not an extra tax, it can be adjusted or refunded when they file their ITR.