Legal Guide

Everything to Know About Section 194n Income Tax Act

by Bhavya Choudhary · 3 min read

194n Income Tax Act

Introduction 

  • The Finance Minister of India introduced the 194n Income Tax Act in the Union Budget for the sole purpose of preventing cash payments and lump sum transfers. 
  • Any cash payments or withdrawal increasing Rs 1 crore was regulated by tax deduction at source (TDS).
  • If the lump sum exceeds 20 lakhs, the TDS is to be deducted at the rates mentioned in the union budget or Section 194n Income Tax Act.

What is meant by Section 194n of the Income Tax Act?

  • If an individual withdraws a large amount during a financial year that is more than INR 1 crore, then section 194n Income Tax Act applies, and TDS is deducted accordingly per the prescribed rates.
  • It can apply to every withdrawal total or an aggregate of the total amount for a specific bank during a financial year.

Any withdrawal by the taxpayers is subject to Section 194n Income Tax Act which includes:

  • Any Individual 
  • HUF
  • Partnership business or LLP
  • Any company or organization 
  • Any association or body of persons.

Where does Section 194n Income Tax Act not apply?

There are some payments where Section 194n Income Tax Act does not apply. 

It will not apply if payments are given:

  • To the Government 
  • To any private or public bank
  • To any cooperative bank 
  • To a post office 
  • Business correspondents of any banking company 
  • ATM operators (white label)
  • Authorized agent or sub dealer
  • The government notified agencies or individuals 
  • Licensed FFMC (RBI)

How is the TDS calculated?

  • The cash payment made by any individual should be tax deducted. The amount exceeding Rs 1 crore is taxed accordingly as per the 194n Income Tax Act rates.
  • There is a limitation of Rs 1 crore per bank or per post office. This is not standard for the total amount transacted from the taxpayer’s account in a financial year.
  • For example: if a particular taxpayer has two different bank accounts, he can withdraw Rs 1 crore from each bank, which is a total of 2 cores without any kind of tax deductions as per Section 194n Income Tax Act.
  • Section 194n Income Tax Act deduction applies only when a taxpayer makes any withdrawal from their maintained accounts.
  • For example, The taxpayer receiving any amount to 1 crore from the bank in a financial year is charged for TDS.
  • As per Section 194n Income Tax Act, the payments made on or after 1st September 2019 will be charged for TDS. The one crore limit applies to the financial year 2019-2020 and any cash payments or withdrawals.
  • The main interest of introducing Section 194n Income Tax Act was to build a digital economy and take it further to increase people’s fluidity with such change.
  • If the individual is not sure about paying TDS or calculating it, they can take legal consultancy services from a professional lawyer.
  • It was officially introduced by the 2019 Finance bill where cash withdrawals in big amounts will attract respective TDS.

Who is liable to deduct TDS under Section 194n Income Tax Act?

The individual who is processing the cash payment is obliged to deduct TDS under Section 194n Income Tax Act.

The individuals include:

  • Any private or public bank
  • A co-operative bank
  • A post office.

Similar to the people who pay TDS, this does not apply for any categories (payee), which are as follows:

  • Any type of Government body
  • Any bank 
  • Co-operative banks
  • Business correspondents of banking companies
  • Any Banks ATM operator (white label)
  • APMC paying farmers 
  • The government notified individuals

Established Purpose of Deducting TDS 

  • The individual taxpayer should deduct TDS when they withdraw or make cash payments over Rs 1 crore for a financial year. The tax is calculated on the total exceeded amount.
  • For example: If contract employees withdraw Rs 1 crore 50 lakhs, then the TDS is deducted and calculated for the excess 50 lakhs only.
  • Even if the money is withdrawn in parts of regular duration, still if the sum exceeds Rs 1 crore, it is calculated under Section 194n Income Tax Act.

What is the Rate of TDS as per Section 194n Income Tax Act?

  • The standard rate of TDS is 2% of the amount paid or withdrawn. It is counted in the amount that is excess after the 1 crore mark for a single financial year.
  • For example: If the excess amount of withdrawal of contract employees from 1 core is 50,000, then the TDS given will be 2% of 50,000 i.e. Rs 1000.
  • If the taxpayer has not filed for up to 3 years in a row, then the valuation of TDS is reduced to Rs. 20 lakh.

The deducted will be : 

  • 2 % on Rs 20 lakh and to 1 car for cash paid and withdrawn.
  • 5% for withdrawing more than Rs 1 crore from any bank in a financial year.

 What are the Advantages of TDS Section 194n Income Tax Act?

There are many advantages related to its official announcement of Section 194n Income Tax Act as it was made to provide a safe digital economy in the country.

The benefits are as follows:

  • Huge amounts of transactions either paid or withdrawn are discouraged and this becomes a medium to promote digital transactions which are much safer and more convenient. 
  • The digital economy and data storage can enable the Income Tax Act department to access transaction data easily if they might need it for further and future investigation or scrutinizing a particular taxpayer. Huge cash transfers are important to keep in check so that there is no misuse of the medium.
  • Section 194n Income Tax Act will help the people of India to change their options and use digital ways of paying and receiving. This is because big amounts in a financial year will attract liability from TDS as per Section 194n of the Income-tax Act.

Conclusion 

The blog explains Section 194n Income Tax Act. Any kind of cash withdrawal or payment needs a good transaction purpose and assessment. This can be done by taking legal consultancy services. 

Talking to a lawyer for Tax related issues might help the taxpayer have a broader vision of how to contribute to the digital economy.

Bhavya Choudhary

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Bhavya Choudhary

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