In a bid to introduce a cashless economy in India, the Finance Minister, Ms. Nirmala Sitharaman declared Section 194N under the Income Tax Act, 1961 during the Union Budget 2019. It states that 2% TDS rate will be subtracted on yearly cash withdrawals of more than Rs 1 crore with effect from 1st September 2019 with regard to banks, cooperative societies and post office accounts.
Goal of passing Section 194 N
This step was taken:
to check heavy cash withdrawals
give big thrust digital payments
monitor cash flow in the country
stop the growth of unaccounted wealth and
slowly end black money in India
Section 194N Of The Income Tax Act 1961 Amended Vide Clause 84 Of Finance Act 2020
Two houses of parliament passed the Finance Bill 2020 by amending the current scope of Section 194N on 27th March 2020 with the ratification of the President of India. The Bill made TDS provisions tough on those who are not filing their income tax returns in the previous years.
It reads as follows-
| Clause 84 of Finance Act 2020 |
| The following section shall be substituted effectively from the 1st July, 2020, with regard to section 194N of the Income-tax Act, namelyEach person, being, — (i) a banking company for which the Banking Regulation Act, 1949 is applicable (including any bank or banking institution referred to in section 51 of that Act);(ii) a co-operative society involved in performing the functions of banking; or(iii) a post office, accountable for paying any amount, being the amount or the aggregate of amounts, as the case may be, in cash going beyond one crore rupees in the last year, to any person (herein referred to as the recipient) from more than one accounts maintained by the recipient with it shall, during the payment of such sum, subtract an amount that is equal to two per cent of such sum, as income-tax:Provided that in case of a recipient who has not filed the returns of income for all of the three assessment years relevant to the three previous years, for which the time limit of file return of income under sub-section (1) of section 139 has expired, immediately preceding the previous year in which the payment of the sum is made to him, the provision of this section shall apply with the modification that—(i) the sum shall be the amount or the aggregate of amounts, as the case may be, in cash exceeding twenty lakh rupees during the previous year; and(ii) the deduction shall be—(a) an amount equal to two per cent. of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds twenty lakh rupees during the previous year but does not exceed one crore rupees; or(b) an amount equal to five per cent. of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds one crore rupees during the previous year: |
A peek into the latest amendments to Section 194N of The IT Act, 1961
TDS has been extended on cash withdrawals in the current amendment to Section 194N of the Income Tax Act, 1961. There will be a deduction of 2 percent of TDS in case the assessee fails to file income tax for 3 years. A 2 percent of TDS will be applicable to cash withdrawal involving more than Rs 20 Lakhs but less than Rs 1 Crore, in a financial year. With regard to cash withdrawals going above Rs 1 Crore, 5 percent of TDS will apply. In case the assessee has filed income tax for the relevant financial year, no TDS deduction will be there. However, if the assessee has taken out cash amounts exceeding Rs 1 Crore, a 2% TDS deduction on the amount will be levied.
These are some examples to best illustrate above mentioned matters
Case 1 – Suppose if A has taken out Rs 99.50,000 from his bank account in a year and later on he withdraws Rs, 2,00,000 in March, the TDS will be for Rs 1,50,000 ( for cash more than Rs 1 Crore). The total payment the recipient receives will be Rs 1,97,000.
Case 2– In case A takes out Rs 1,00,00, 000 from his bank in a year and later gives a bearer cheque to B, his friend for Rs 5,00,000 to be paid in cash, there won’t be any TDS over here. Despite the cash taken exceeding Rs 1 Crore, in this case, the bank account of the recipient and the holder are different.
Note: Any kind of account held by an individual in a bank falls under the Rs 1 Crore ceiling. For instance, assuming that A holds both current and savings accounts with the same bank, the prescribed limit of Rs 1 crore will apply on the total cash withdrawals from both the accounts.
Case 3- In case A has an account in a separate branch of the same bank in the country, the ceiling of Rs 1 Crore will be there on the net cash withdrawals from the branches in the same bank.
Case 4– In case A has several accounts in diverse banks and takes out cash exceeding 1 crore from different banks, TDS won’t be there for him in such a scenario.
Principal tips regarding Amended Section 194N
This section is applicable to cash in takes from banks including cooperative banks and post office accounts.
The ceiling of Rs 1 Crore will cover based on bank and not on branch. This is as a result of main banking solutions presently executed by banks.
TDS levies on cash withdrawals will come into the equation if the total amount of intakes in a financial year exceeds Rs 1 Crore from one or more bank accounts.
The purpose of cash withdrawals i.e. for professional or personal reasons is immaterial under Section 194N.
TDS rates will only apply on the excess amount of cash withdrawal not on total amount. The sum beyond the prescribed limit will come under the ambit of TDS.
2% and 5% are deduction rates for TDS with regard to certain cases where the assessee has failed to file tax returns in the last few years.
The Amended Section 194N Under TDS (FY 2020-21) will come into effect from 1st July 2020.
Provisions of Amended Section 194N apply to-
An Individual
A Hindu Undivided Family or HUF
A Local Authority
A Company
Partnership Firm/LLP
Body of Individuals (BOIs) or Association of Persons (AOPs)
The payers in the ambit of Section 194N are –
Private and Public Sector Banks
A Post Office
A co-operative bank
Exemptions Under Section 194N-
The Government
Any White Label ATM Operator of any Bank
Banks with the inclusion of cooperative banks
Business correspondent of a banking company
Any other person notified by the Government of India
Farmers- The Central Government has prescribed the specifications for trader or commission agent functioning under the Agriculture Produce Market Committee (APMC) vide Notification No. 70/2019-Income Tax Dated 20th September, 2019.
The Central Board of Direct Taxation (CBDT) excludes cash intakes by an authorized dealer or an agent of its franchise or sub-agent and a RBI licensed Full-Fledged Money Changer (FFMC) or any agent from its franchise from TDS net under Section 194N subject to conditions laid out vide Notification No. 80/2019-Income Tax dated 15th October 2019.
Benefits of Section 194N
Heavy cash intakes will come down drastically and digital exchanges and payments will go up.
Help the Tax Department to evaluate data conveniently and huge cash transactions can be probed.
An organized automated system will come up for encouraging digital payments and an economy devoid of cash.
Hiccups regarding amended Section 194N
A strong TDS deduction automated system will be required for each transaction to find accounts where cash intakes cross Rs 1 Crore.
Deployment of the automated system falls on banks and other financial establishments. The toughest arena is the ATMs where implementing the system will be tough for banks and other financial departments. An automated mechanism has to be integrated with ATMs where cash withdrawals beyond Rs 1 crore can be found with ease.
Conclusion
It is creditable on the part of the Indian Government to bring in financial reforms to achieve the objective of a cashless economy. Post demonetisation, the arrival of Section 194N and its current amendment is a good effort in pushing digital transactions and eliminating cash transactions slowly from the country.