TDS on Withdrawal by banking company Section 194N by CS Sayan Ghosh

Finance Act 2019 inserts a new provision, namely, section 194N, to provide for "TDS on cash withdrawal to discourage cash transactions", with effect from 01-09-2019.

The following provisions is as follows:-

Every person being :

  • a banking company (to which a Banking Regulation Act, 1949 applies)
  • a co-operative society engaged in carrying on business of banking and;
  • a post office,

is obliged to deduct tax.

The banker must be responsible for paying any sum or aggregate sums, in cash, in excess of Rs. 1 Crore, during a previous year;

Such payment must be made to any person (recipient) from one or more accounts maintained by the recipient with the banker;

The banker shall deduct 2% of the sum exceeding Rs. 1 Crore, as income tax and;

The tax must be deducted at the time of the payment to the recipient in cash

There are some excluded payments to which Section 194N does not applies if payment made to:

  • Government,
  • any banking company,
  • any co-operative society engaged in carrying on banking business,
  • post office,
  • any business correspondent of a banking company or a co-operative society engaged in banking business, in accordance with guidelines issued in this regard by the RBI,
  • any white label automated teller machine operator of banking company or co-operative society engaged in banking business, as per authorisation issued by RBI under Payment and Settlement Systems Act, 2007, and
  • such other person or class of persons as may be notified by Central Government in consultation with RBI.

A proviso is inserted in Section 198 which lays down that the amount deducted ( @ 2% of cash withdrawals in excess of Rs. 1 Crore) will not be considered as income.

Deduction from Payment in excess of threshold:-

Deduction of tax is required, by the banker, only after the payment exceeds the threshold specified of Rs. 1 Crore; till payment in cash of Rs. 1 Crore, there is no obligation; if the payment in cash exceeds Rs. 1 Crore tax needs to be deducted only from the payments in excess of the threshold.

To following situation is illustrated is as follows-

Mr. Ghosh has withdrawn Rs. 99 lakhs and proposes to withdraw Rs. 5 Lakhs; the excess over the threshold is Rs. 4 lakhs; accordingly the banker is required to deduct tax at 2% from Rs. 4 lakhs i.e Rs. 8000/-

So, such deduction would be reflected in the bank account as deduction of tax.

The threshold limit would apply in respect of each previous year separately; if the withdrawal in cash , say , in previous year X is in excess of the threshold limit, on the excess, the bank would be required to deduct tax; However, if, in previous year Y, the cash withdrawal does not exceed the threshold limit, no tax to be deducted.

Exemption in case of notified person:-

Some businesses required to withdraw cash for effecting payments at places where it may not be possible to make payment otherwise than through cash.

In some cases, it may possible for an entity to approach authorities to notify it and seek exemption from the operation of this section.

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