• Notification Date: 18-01-2022
• Notification No: N/A

TDS Charged on Cash Withdrawal from Banks/Post Offices

According to Section 194N that was inserted by the Finance (No. 2) Act, 2019, under the Income Tax Act, 1961, tax deduction at source (TDS) will be charged on cash withdrawal from banks and post offices. This rule has been made to discourage heavy cash transactions and to encourage a less-cash economy. TDS will be charged on withdrawal amounting to more than 1 crore. But for those taxpayers who have not paid their ITRs for the last three years, the Union Budget, 2020, has restricted the threshold limit to Rs20 lakh.

Who has the Right to Deduct TDS?

TDS is deducted by the co-operative and public banks or post offices. The amount of TDS ranges from 20lakh rupees to 1crore rupees from the account of the holder.

What is the Rate of TDS?

The tax amount will be deducted from the account of the holder at the time of a cash withdrawal ranging from 20 lakh to 1crore rupees in a financial year according to their credentials. If the withdrawal exceeds the limitation of 1crore, then 2% TDS will be charged against the person, if he/she has already paid the ITR of the previous three AY. If the person has not filed the ITR for the last three years, then 2% TDS will be charged for a cash withdrawal exceeding 20lakh rupees and 5% for a transaction exceeding 1crore rupees.

The Necessity of Deducting TDS on Cash Withdrawal under Section 194N

According to the income tax experts, it is very important to enable the TDS deduction provision under Section 194N. The provision is required since cash withdrawal is not an income.  

According to Taxmann, Finance (No. 2) Act, 2019 introduced Section 194N, under the Income Tax Act, 1961. This was further substituted by the Finance Act (2020) with a new provision. Under this provision, an individual will be charged with TDS on a cash withdrawal from their account that is maintained with a public or cooperative bank, or a post office.

Chapter XVII covers Section 194 N. It is related to tax collection and recovery. The enabling provision is stated under section 4 and section 190.

Section 4(1) states that the income tax should be charged according to the total income of that particular year. Section 4(2) states that income tax is to be deducted at the source or it has to be paid in advance.

Section 190 relates to the collection and deduction of tax. It also concerns the payment of advance tax. Section 190(1) says that though the regular assessment of any income can be made later in the financial year, the income tax should be deducted at source or by advance payments. This rule is stated under section 192 (1A).

Income tax should be collected or deducted as per the income of the assessee. If the amount received by the individual is not proven as an income, then there will be no collection or deduction of income tax at the source.  

Naveen Wadhwa, DGM of Taxmann, comments that this new provision of tax deduction contradicts the provisions stated under section 4 and section 190. He says that in cash withdrawal there is no income component. Hence, TDS should not be deducted from cash withdrawals. He adds that the government should make suitable amendments under the law to resolve the litigations concerned with this matter.

The Supreme Court has approved this appeal for CIT v. Eli Lilly & Co. (India) (P.) Ltd. [2009] 178 Taxman 505 (SC). The court states that TDS will not be deducted if any particular income falls under Section 4(1). The Madras High Court has also given the verdict in the case of the Tirunelveli District Central Co-operative Bank Ltd. v. JCIT [2020] 119 taxmann.com 21 (Madras). The court says that tax cannot be deducted under Section 194N.