FAQs on cash withdrawal tax

The Budget introduced TDS of 2 per cent on cash withdrawals of over Rs 1 crore. Here’s how it works

The Centre has been serious about unearthing black money and promoting electronic transactions through several initiatives. Budget 2019 featured two such measures — mandatory requirement for all companies with a turnover greater than ₹50 crore to have a digital payments option for their customers to reduce dependency on cash for business transactions, and the ‘cash withdrawal deterrence tax’, 2 per cent TDS on cash withdrawals over ₹1 crore. Here are the nitty-gritty of the new provision.

What is the amount on which TDS under Section 194N is applicable?

Tax will be deducted on sums exceeding ₹1 crore. For instance, if a person withdraws ₹1.1 crore, the tax deducted at source at the rate of 2 per cent would be applicable on ₹10 lakh — ₹1.1 crore less ₹1 crore. Another example to note would be, say, the aggregate of the cash withdrawals made so far is ₹99.8 lakh and the next cash withdrawal is of ₹1 lakh. As the aggregate cash withdrawals exceeds ₹1 crore and is now at ₹1,00,80,000, should the TDS be done on the excess over ₹1 crore — on ₹80,000 — or on the current cash withdrawal amount, ie, ₹1 lakh?

From a plain reading of the provisions, it should be applicable on the ₹80,000. Hence, post-TDS of 2 per cent — ₹1,600 — the bank should release a net cash payment of ₹98,400. In simple terms, the method prescribed under Section 194N of the Income Tax Act is similar to tax collection-related provisions (TCS) at the rate of 1 per cent, as applicable on purchase of vehicles for cost exceeding ₹10 lakh.

Is the threshold of ₹1 crore an annual limit or a one-time withdrawal limit?

The threshold is for all withdrawals during a financial year. Hence, if the withdrawal exceeds ₹1 crore during a financial year, the TDS would be applicable on the sum exceeding ₹1 crore. As the provision is applicable from September 1, 2019, the threshold of ₹1 crore should be counted for the period beginning September 1, 2019, till March 31, 2020, and any cash withdrawal done prior to September 1, 2019, should not be considered while determining this threshold.

However, in the absence of any explicatory clarification, it is not free from doubt if the corresponding period should be the full fiscal year — April 1, 2019, to March 31, 2020 — and hence, cash withdrawals made prior to September 1, 2019, is to be considered as well.

Is the threshold of ₹1 crore account-specific or in aggregate for withdrawals?

The section provides that the threshold of ₹1 crore would be an aggregate for withdrawals from one or more accounts maintained by the recipient. Hence, if a person maintains more than one account with different branches of the same bank, the limit of ₹1 crore would be reckoned for all such accounts taken together. However, in case of joint accounts, the provisions should be applied per person.

Would TDS under Section 194N apply on specific categories of bank accounts?

The provision doesn’t clearly specify or restrict any category of bank accounts. Hence, cash withdrawals from any category of accounts — savings, current, cash credit, recurring deposit, fixed deposit, salary, overdraft — should be covered under this ambit.

Would TDS under Section 194N apply on issuance of bearer draft/bankers’ cheque/pay order for amounts exceeding ₹1 crore, which could be encashed by the recipient at a later point in time?

TDS under Section 194N should not be applicable on such instruments as the bank is not paying any sum in cash.

Is tax credit available on TDS done under Section 194N?

Although the provision states that the deduction is by way of income tax, cash withdrawal is not an income liable to be taxed under the I-T Act. The Finance Minister, in the course of the debate on the Finance Bill, had assured that if tax-paying citizens have withdrawals like this, the TDS will be adjusted against the total tax dues. More clarity is needed on this aspect.

The writer is Director, Nangia Advisors (Andersen Global)

Published on August 11, 2019

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