Tax on Current Bank Account: Overview, tax implications & TDS deductions

Understanding the tax on a Current Account is animportant aspect of managing the finances of yourbusiness. Paying less tax can invite penalties whilepaying too much eats into your profits. The bestapproach is to be savvy about current income tax andsafeguard your business revenue and finances.

Tax implications for Current Account holders

Typically, businesses tend to transact much more thanindividuals. Financial transactions include cashdeposits, cash withdrawals and transfers. However, aSavings Account usually has a cap on the number oftransactions, as well as the value. Hence, it isunsuitable for businesses – especially, as they scale.

This is where a Current Account comes with theadvantage of unlimited transactions and a larger cashdeposit limit. This account also enables higheroverdraft facilities and superior payment solutions,among other benefits. Entities such as soleproprietorships, LLPs and private and publiccompanies, can open a Current Account.

Current Account interest rates and taxation

Unlike a Savings Account, your Current Account doesnot generate interest, no matter how much theaccount balance. Hence, this is a tax-free accountwhere no income tax on the Current Account isdeducted. However, there are some taxable events inCurrent Account management.

For instance, Tax Deducted at Source (TDS) appliesonce cash withdrawals cross the threshold of theCurrent Account tax limit in India. This amount can beclaimed when filing your company’s tax returns. But itis helpful to be aware of the Current Account limitwithout tax.

However, taxable transactions on Current Accountscannot be isolated, and the income tax applicabledepends on the taxable income from Current Account,or multiple accounts. There are also no capital gainstax on Current Accounts, since this account does notearn any interest. Nevertheless, tax planning forCurrent Account holders is important just as it is forany individual. For instance, corporate tax planning forCurrent Accounts can help reduce tax liabilities forlarger corporations and multi-nationals.

TDS on cash withdrawals from Current Accounts

There is no income tax on Current Accounts. However,under Section 194N of the Income Tax Act, banks arerequired to deduct tax at source when the aggregatesum of cash withdrawals exceeds a certain limit. If youhave more than one Current Account in a bank, thenthe aggregate cash withdrawal is considered. Thestatus of Income Tax Returns (ITR) filing also plays arole. Withholding taxes on Current Accounttransactions can invite penalties to the bank; hence,this is an important step.

Here’s a look of taxable withdrawals from CurrentAccounts that attract TDS:

1.Aggregate cash withdrawals up to 20 lakh

There is no TDS on aggregate cash withdrawals of upto 20 lakh if ITR has been filed for any of the last threeyears, and also if it has not been filed for all of the lastthree years.

2. Aggregate cash withdrawals between 20 lakh and1 crore

• There is no TDS if ITR has been filed for any ofthe last three years.
• 2% of TDS applies if ITR has not been filed forall of the last three years.

3. Aggregate cash withdrawals above 1 crore

• 2% of TDS applies if ITR has been filed for anyof the last three years.
• 5% of TDS applies if the ITR has not been filedfor all of the last three years.