Understanding Section 194N of Income Tax Act 1961: A Detailed Overview

Section 194N of Income Tax Act 1961: We should note that Section 194N is nothing but a TDS –Tax Deducted at source and the same is to be deducted on ‘Aggregate Withdrawal’ in a financial year.

In simple terms, this section speaks about the deduction of TDS under certain circumstances i.e., if the aggregate withdrawal of a person during a financial year exceeds Rs. 1 crore then the person (recipient) is liable to a deduction of TDS u/sec 194N which is @ 2% on the amount in excess of Rs. 1 crore.

The aforesaid section 194N was introduced by the Finance Minister in Union Budget 2019 thereby promoting cashless transactions and leading to a digitalized India.

Explain the Amendment with effect from 01st July 2020?

Now we should develop a basic understanding that 194N is the practicality that everyone is going to face especially from the financial institution like banks wherein they are going to deduct 2% from your bank balance as soon as you cross the withdrawal limits.

In terms of amendments or any up gradation, Section 194N has attracted amendment in the Finance Act 2020 stating that any person who has not filed Income tax returns of the last three financial years immediately preceding the year in which he has done withdrawals then the threshold limit of such specified person reduces from Rs. 1 crore to Rs. 20 lakhs and the rate of TDS applicable would be 2% on the amount exceeding Rs. 20 lakhs and if the total withdrawals exceeds Rs. 1 crore, the TDS would be deducted @ 5% on the amount exceeding Rs. 1 crore.

In other words, if the total withdrawals > Rs. 20 lakhs and< Rs. 1 crore, then TDS @ 2% is applicable.

(OR)

if the total withdrawals > Rs. 1 crore, then TDS @ 5% is applicable.

Applicability of Section 194N: Who is Affected by the Provision?

Section 194N of the Income Tax Act 1961 has been introduced to regulate cash withdrawals and impose tax obligations on certain individuals. The provision aims to track high-value cash transactions and discourage the use of cash in large financial transactions. Understanding the applicability of Section 194N is crucial to determine who is affected by this provision.

Primarily, Section 194N applies to individuals who make cash withdrawals exceeding a specified threshold within a specified time frame. The provision mandates that if an individual withdraws an amount exceeding Rs. 20 lahks (as per the current threshold) in aggregate from one or multiple bank accounts during a financial year, a tax deduction is applicable at the rate of 2% on the amount exceeding the threshold.

It’s important to note that the provision affects individuals across various categories, including salaried employees, self-employed professionals, business owners, and other taxpayers. Anyone who withdraws cash from their bank accounts and surpasses the specified threshold within a financial year falls under the purview of Section 194N.

However, there are a few exceptions and exemptions to consider. Section 194N does not apply to certain specified individuals, such as the government, banks, financial institutions, cooperative societies, white-label ATM operators, and others as notified by the government. Additionally, there are instances where cash withdrawals are exempt from the tax deduction under Section 194N, such as withdrawals for specific purposes like medical treatment, purchase of agricultural products, etc.

Financial institutions play a significant role in implementing Section 194N. They are responsible for deducting the applicable tax at the time of cash withdrawal and depositing it with the income tax authorities. They are also obligated to report the relevant information to the income tax department to ensure compliance.

To comply with the provision, individuals affected by Section 194N must be aware of the cash withdrawal limits and tax deduction rates set by the government. They need to keep track of their cash withdrawals and be prepared for the tax implications if they exceed the threshold. It is advisable to maintain proper records and seek professional advice to ensure accurate compliance with the provisions of Section 194N.

It’s worth noting that tax laws and provisions are subject to change, and individuals should stay updated with any amendments or modifications to Section 194N to fulfill their tax obligations accurately and timely.