Section 194N for deduction of tax at source (TDS) on cash withdrawals exceeding Rs. 1 crore was introduced by the Finance Minister in the Union Budget 2019. This section applies to an aggregate of sums withdrawn from a particular payer in a financial year. The Government has introduced Section 194N in the Union Budget 2019 with the objective to discourage cash transactions in the country and promote the digital economy. Section 194 N of the Income Tax Act has been amended vide clause 84 of the Finance Act 2020.
This section has been made applicable w.e.f. 01st July 2020 & is applicable to withdrawals made by individuals, HUF, company, partnership firm, LLP, local authority & AOP/BOI.
The person making the cash payment will have to deduct TDS under Section 194N, which includes any bank, co-operative bank, and post office.
A. TDS rules for those who have filed ITR for last 3 years & have PAN linked with Bank Account:
TDS @ 2% will be deducted on cash withdrawals exceeding Rs. 1 crore.
B. TDS rules for those who have not filed ITR but have PAN linked with Bank Account:
If you have not filed ITR for three years immediately preceding this year, then the rate of TDS deduction increases.
For cash withdrawals upto 20 lakh: No TDS
For cash withdrawals of 20 lakh- 1 crore: TDS at the rate of 2%
For cash withdrawals exceeding 1 crore: TDS at the rate of 5%
However, for those whose PAN (Permanent Account Number) is not updated in the bank’s records, then a much higher TDS of 20% is deducted under Section 206AA of the Income Tax Act instead of the 2%/5% specified above.
Further please also note that although the new TDS rule came into force from July 1, the cash withdrawal limit for this financial year will be considered from April 1, 2020.