Tax Deducted at Source (TDS) on cash withdrawals is a regulatory measure implemented by the government to deter large cash transactions and promote digital payment methods. Below is a comprehensive overview of its provisions, applicable rates, and exemptions.

Governing Provision: Section 194N of the Income Tax Act

Section 194N of the Income Tax Act mandates TDS on cash withdrawals that exceed specified thresholds from banks, cooperative banks, or post offices.

This provision was introduced on September 1, 2019, to regulate cash flow and ensure adherence to income tax regulations.

Understanding TDS on Cash Withdrawals Under Section 194N

Under Section 194N of the Income Tax Act, Tax Deducted at Source (TDS) applies to cash withdrawals that surpass specific thresholds within a financial year (FY):

  • Rs 20 lakh: For individuals who have not filed Income Tax Returns (ITRs) for all three preceding Assessment Years (AYs).
  • Rs 1 crore: For individuals who have filed ITRs for at least one of the three preceding AYs.

TDS Deduction Rates on Cash Withdrawals Under Section 194N

The TDS rates are based on the individual’s ITR filing status:

For ITR Filers (Any or All of the Three Previous AYs):

  • 2% on cash withdrawals exceeding Rs 1 crore within a financial year.

For Non-ITR Filers (All Three Previous AYs):

  • 2% on cash withdrawals exceeding Rs 20 lakh but not exceeding Rs 1 crore.
  • 5% on cash withdrawals exceeding Rs 1 crore within a financial year.

This regulation aims to enhance transparency and compliance with income tax laws and to minimize excessive cash transactions.

Guidelines for TDS Applicability

For Withdrawals Exceeding Rs 1 Crore:

  • Rate: 2% of total cash withdrawals.
  • Applies to: Withdrawals made from one or more accounts held by a customer throughout a financial year.

Updated Rules Effective July 1, 2020:

If the individual has not filed income tax returns for the preceding three financial years, the following rates apply:

  • 2% on total cash withdrawals exceeding Rs 20 lakh but not exceeding Rs 1 crore.
  • 5% on total cash withdrawals exceeding Rs 1 crore.

In other cases, the standard TDS rate of 2% continues to apply.

From April 1, 2021 Onwards:

All cash withdrawals across different accounts are aggregated for TDS calculation.

In Absence of PAN/Aadhaar:

TDS is charged at an elevated rate of 20%.

Who Is Responsible for Deducting TDS on Cash Withdrawals Under Section 194N?

TDS under Section 194N is deducted by banks (private, public, and cooperative) or post offices when cash withdrawals exceed the stipulated thresholds of Rs 20 lakh or Rs 1 crore, based on the individual’s ITR filing status.

Exemptions from TDS on Cash Withdrawals

Certain entities and individuals are exempt from TDS under Section 194N, including:

  • Government entities
  • Banking companies, cooperative societies, and post offices
  • Business correspondents of banking institutions
  • White label ATM operators authorized by the Reserve Bank of India
  • Central Government notified entities, subject to specific conditions:
    • Cash Replenishment Agencies (CRAs) and franchise agents of white label ATM operators
    • Commission agents or traders operating under Agricultural Produce Market Committees (APMC)
    • Authorized Dealers under FEMA, including franchise agents, sub-agents, and Full-Fledged Money Changers (FFMCs)

This structured framework ensures adherence to income tax regulations while promoting transparency and reducing reliance on cash transactions.