In order to create a “Digital India,” the Indian Government has been working day in and day out over the last few years to reduce cash transactions and promote digital transactions. With the introduction of demonetisation, the Government has created new constitutional provisions that serve the objective of the country’s transition to a cashless economy. Finance Minister Nirmala Sitharaman included Section 194N in the Union Budget 2019 to reduce cash usage and actively support digital payments.
What is Section 194N?
Section 194N, introduced in the Union Budget 2019, provides that a 2% Tax Deducted at Source will be levied on yearly cash withdrawals in excess of Rs. 1 crore, effective September 1, 2019. It must be noted that the effective limit of Rs. 1 crore every fiscal year is determined in relation to each individual bank, cooperative society, and post office account.
In other words, if you have different accounts with the same bank, the amount of cash withdrawn would be evaluated for TDS deduction. However, the TDS threshold for each bank will be Rs. 1 crore if you have different accounts with different banks.
Extract of Section 194N
According to the finance bill, 2019 dated July 5, 2019, available on the official website of the income tax department of India, the section 194N is:
Every person, being
(i) a financial institution covered by the Banking Regulation Act of 1949 (10 of 1949);
(ii) a cooperative society engaged in carrying on the business of banking; or
(iii) a post office,
Whoever is in charge of paying any sum, being the amount or the sum of amounts, as the situation may be, in money surpassing one crore rupees during the prior year to any individual (herein referred to as the recipient), must therefore, at the point of payment of these kind of total amount, deduct a sum equivalent to two percent of such total amount, as income-tax.
if a recipient has not filed returns of income for all three years of assessment pertaining to the three prior years, in which the deadline to file tax returns of revenue under subsection (1) of section 139 has passed, the clause of this section will not impose in his case, the clause of this section will impose with the change that—
(i)The sum would be the total of all payments made in cash during the previous year that exceeded Rs. 20 lakh;
(ii) The deduction shall be—
(a) a sum of money equal to 2% of the total amount in cases where the total of all payments made in cash during the prior year surpass an amount of Rs. 20 lakhs but not more than Rs. 1 crore, or
(b) an amount equal to 5% of the sum in cases where the total of all payments exceeds Rs. one crore in the during the last year
Additionally, no payment shall be subject to the provisions of this section made to—
(i) The Government
(ii) a cooperative society or banking institution that operates a post office or engages in banking;
(iii) according to the instructions provided in accordance with the guidance offered in this respect by the Reserve Bank of India pursuant to the Reserve Bank of India Act, 1934 (2 of 1934), any business associate of a commercial bank or cooperative society involved in carrying on the business of banking falls under category;
(iv) Any white label ATM operator working for a banking firm or cooperative society that is conducting banking operations in line with the Reserve Bank of India’s authorization under the Payment and Settlement Systems Act, 2007 (51 of 2007)
Who is Liable to Pay the Tax?
According to the provisions of Section 194N, the following people have to pay 2% TDS on yearly cash withdrawals in excess of ₹1 crore:
- An Individual Taxpayer
- An individual who is a non-resident of India
- Hindu Undivided Family (HUF)
- Any Domestic or Foreign Company
- Partnership Firm, Limited Liability Partnership LLP
- Local Authority
- Association of Persons (AOP)
- Body of Individuals (BOI)
Exemptions under TDS Section 194N
The section will not be applicable if the payment is made to:
- The Government
- Any bank (private or public sector)
- A cooperative bank
- A postal service
- Correspondents for business with a bank
- Operators of White Label ATMs for any Bank.
- Under the direction of the Agriculture Produce Market Committee (APMC), a specific dealer or commission agent Income Tax Notification No. 70/2019, dated September 20, 2019.
- An authorised dealer or agent/sub-agent of its franchise,
- Any agent from a Full-Fledged Money Changer (FFMC) with an RBI licence who complies with the terms of Notification No. 80/2019-Income Tax dated October 15, 2019.
- Every additional individual whom the Indian government has notified.
Benefits of Section 194N
Income Tax Section 194N, introduced in the Finance Act 2019, imposes a TDS (Tax Deducted at Source) on cash withdrawals exceeding INR 1 crore in a financial year from a bank account. This section has been introduced to curb the menace of black money and ensure that taxes are paid on the money being withdrawn. Here are some benefits of this section for TDS:
With the introduction of Section 194N, people will be more cautious about large cash withdrawals from their bank accounts, which will improve the compliance level. The Government will be able to monitor large cash transactions, thereby reducing the scope for black money.
The introduction of this section is expected to increase the Government’s revenue collection as people will be more careful about large cash withdrawals. The TDS imposed on such transactions will help the Government in increasing its tax revenue.
The TDS imposed under Section 194N will help the Government monitor large cash withdrawals, thereby reducing the scope for black money. The tax collected through TDS will give the Government a better idea of the source of the money and help them track the black money.
Ease of Administration
Section 194N is very easy to administer and will save the Government a lot of time and effort in tracking large cash withdrawals. The bank will be responsible for deducting the TDS and depositing it with the Government, which will reduce the workload of the tax department.
Encouragement of electronic transactions
With the TDS implications of large cash withdrawals, individuals and businesses may be encouraged to use electronic transactions, such as electronic transfers or cheques, that are not affected by the implications of Section 194N.
Section 194N of the Income Tax Act is an essential milestone towards eliminating black money, increasing tax collection, and encouraging digital payments. The implementation of this section is expected to boost revenue collection for the Government. The Government would be able to follow the whereabouts of the funds with the help of the TDS on significant cash withdrawals, which will limit the opportunity for illegal activity. Overall, Section 194N is a beneficial move for the Indian economy and will support its expansion and stability. The Government intends to establish a transparent and compliant tax environment in India by imposing TDS on significant cash withdrawals.