To discourage cash transactions in the country and promote digital economy, the government, in July 2019, introduced Section 194N in the Income Tax Act, 1961 for tax deducted at source (TDS) at the rate of 2 per cent on cash withdrawals over and above ₹1 crore. The Finance Act, 2020 tightened it by lowering the threshold of ₹1 crore to ₹20 lakh for those who have not filed their income tax returns (ITRs) for the past three years. Further, the rate of TDS has also been increased to 5 per cent for these taxpayers for withdrawal exceeding ₹1 crore.

2% TDS for amounts over ₹1 crore

The existing Section 194N of the Income Tax Act, 1961 directs banks, co-operative banks and post offices to deduct TDS at the rate of 2 per cent, if the aggregate cash withdrawal by a person ― from all the accounts maintained by that person in a bank ― exceeds ₹1 crore during a financial year. This provision was made applicable for payments made from September 1, 2019.

TDS would be charged only on the amount withdrawn above the limit of ₹1 crore. That is, if the aggregate amount of cash withdrawn during a financial year is ₹1.2 crore, TDS will be applicable on ₹20 lakh (₹1.2 crore minus ₹1 crore) at the rate of 2 per cent, which will be equal to ₹40,000.

Here, the threshold of ₹1 crore is applicable bank-wise. Considering the above example, if the cash withdrawn during a financial year is ₹1.2 crore ― ₹80 lakh from Bank ‘A’ and ₹40 lakh from Bank ‘B’, TDS will not be deducted by either of the banks as withdrawal from a single bank did not exceed the threshold of ₹1 crore.

Further, cash withdrawn from all the accounts of an account holder in a bank is considered. Also, cash withdrawn across the counter ― through ATM (using credit or debit card), cash withdrawal against overdraft facility, and cash delivery under Cash Management Services ― will be included.

Lower threshold if ITRs not filed

The Finance Act, 2020 expanded the scope of Section 194N by lowering the threshold of ₹1 crore to ₹20 lakh for those who have not filed their ITRs in the previous years. This new rule will be applicable from July 1, 2020.

For those who have filed the ITRs, the threshold of ₹1 crore and TDS rate of 2 per cent, as explained earlier, will continue to be applicable. ITR should have been filed for all the three preceding financial years ― for which the due date to file the ITR has expired.

That is, if cash is withdrawn during April 2020 (during FY21), ITRs of the person should have been filed for FY17, FY18 and FY19. ITR for FY20 will not be required as the due date to file ITR for this financial year, which is July 31, 2020 (unless extended), has not expired.

For those, who have not filed the ITRs for at least one of the three preceding years, the deduction will be in the following way-

a) TDS at 2 per cent where the aggregate cash withdrawal exceeds ₹20 lakh during a financial year but does not exceed ₹1 crore; or

b) TDS at 5 per cent where the aggregate cash withdrawal exceeds ₹1 crore during a financial year

In both the cases, TDS shall be deducted on the amount exceeding ₹20 lakh, says Naveen Wadhwa, Deputy General Manager, Taxmann.com.

For instance, if a person who has not filed ITR returns in the previous years withdraws cash of ₹1.4 crore, the TDS rate of 5 per cent will be applicable because it exceeds the threshold of ₹1 crore. The amount of TDS will be calculated on the amount withdrawn exceeding ₹20 lakh, that is, on ₹1.2 crore. Thus, the TDS amount of ₹6 lakh (₹1.2 crore*5 per cent) will be deducted by the bank and balance ₹1.34 crore will be remitted.

In another case, a non-filer of ITRs withdraw cash of ₹50 lakh in two instalments (first – ₹20 lakh; next – ₹30 lakh). The person falls under the first category as the amount withdrawn is not more than ₹1 crore and TDS rate of 2 per cent will be applicable. For the first withdrawal, TDS will not be deducted as it does not exceed ₹20 lakh. However, TDS of ₹60,000 (₹30 lakh*2 per cent) will be deducted during the second cash withdrawal and balance ₹29.4 lakh will be remitted.

If that person withdraws another ₹60 lakh in the same financial year, making the aggregate cash withdrawal ₹1.1 crore, he falls under the second category as a whole and TDS at the rate of 5 per cent is applicable on the cash withdrawal exceeding ₹20 lakh, says Wadhwa.

Thus, the applicable TDS amount will be 5 per cent on ₹90 lakh (₹1.1 crore – ₹20 lakh) – ₹4.5 lakh. As TDS of ₹60,000 was already deducted during the previous cash withdrawal, the balance of ₹3.9 lakh will be deducted as TDS while payments of ₹60 lakh and ₹56.1 will be remitted.

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