Important Points About 194N TDS Section

Q: What are the 4 types of TDS return?

The 4 types of TDS returns are 24Q for TDS deductions from salaries, 26Q for TDS deductions from payments except for salaries, 27Q for tax deductions from dividends, interest or other amounts payable to non-residents and 27EQ for tax collection at source.

The Finance Minister of India, Nirmala Sitharaman, developed the 194N TDS section in the 2019 Union Budget to boost digital payments and discourage cash usage. Moreover, it shall help the government monitor cash flow and thus check the accumulation of unaccounted wealth. A 2% TDS shall be deducted on cash withdrawals above Rs. 1 crore during a particular financial year. The applicable Rs. 1 crore limit per financial year is set per cooperative society, post office, or bank account. If you have many accounts in the same bank, the total cash withdrawn will fall under the TDS deduction. Nevertheless, in the case of several accounts with varied banks, the TDS limit for each account shall remain at Rs. 1 crore.

Eligibility to Deduct TDS under Section 194N

According to Section 194N of the Income Tax Act, every person who makes a cash payment of more than Rs. 1 crore in a financial year to any recipient must deduct TDS at 2%. Individuals eligible to deduct TDS according to the provisions of Sec 194N of the Income Tax Act include:

Post offices
Public or private banks
Cooperative banks

TDS deduction on cash withdrawal under the TDS 194N section applies to all taxpayers, including:

HUF or Hindu Undivided Family
Individual
Company
Local authority
LLP or partnership firm
AOPs or Association of Persons or BOIs or Body of Individuals.

Also, a few TDS exemptions on cash withdrawal are under section 194N. These include:

Private and public banks
The government
Business correspondents of banks, including cooperative banks.
Cooperative banks
White-label ATM operators of banking companies
Other individuals, as notified in Official Gazette

Understanding TDS Rate under Sec 194N

On cash withdrawals over Rs. 1 crore, the TDS is 2%, applicable from 1st September 2019. For example: If you withdraw Rs. 1.5 crore from a bank during a fiscal year, your bank shall deduct TDS at 2% on the amount exceeding Rs. 1 crore. So, in this case, your TDS amount payable shall be calculated at Rs. 50 lakh. Since 2% of Rs. 50 lakh is Rs. 1 lakh; you must pay a TDS of Rs. 1 lakh.

TDS Credit under Section 194N

According to the CBDT notification, taxpayers can claim TDS credit for accounts where TDS on cash deposits was deducted for the financial year. Suppose your total tax liability for a certain financial year is Rs. 10 000. The total TDS amount deducted on cash withdrawal above Rs. 1 crore will be Rs. 1 000. You can claim Rs. 1 000 or the TDS deducted as a tax credit and pay only Rs. 9 000 as total tax for that particular financial year.

Changes Made to 194N Income Tax TDS Section Before 2023 Budget

A few changes were introduced in 194N Section in the Finance Act, 2021 reducing the TDS threshold limit on cash withdrawal from Rs. 1 crore to Rs. 20 lakhs for individuals who did not file their income tax returns for the three previous years and with accounts not linked to their Aadhaar. The provision was effective from 1st July 2021. The Finance Act 2021 also introduced another provision under Section 206AB, bringing in higher TDS rates for non-filers of income tax returns.

Effective from 1st July 2021, this provision lays down that the TDS rate will be 5% or double the applicable rate, whichever is higher, for people who have not filed their income tax returns for the last few years with an aggregate TCS and TDS exceeding Rs. 50, 000 in both the years. Both provisions or changes in TDS under section 194 are subject to certain exemptions and conditions. Therefore, taxpayers must get expert advice on their respective tax obligations.

Benefits of TDS Section 194N

A few major benefits of Section 194N Income Tax Act include:

The section promotes digital payments while blocking the way for huge transactions and cash withdrawals.
It has made it easier for the tax department to access data on large cash transactions and investigate such transactions.
The public can boycott all conventional transactions as huge cash withdrawals can result in TDS liabilities.

Challenges of Executing Income Tax Act 194N Section

A few challenges of executing Section 194N of Income Tax include:

Group deductors must develop a solid system for all transactions from varied accounts to identify withdrawals exceeding Rs. 1 crore easily. Introducing a mechanism that automatically deducts TDS from such transactions is important.
Financial institutions and banks must develop an automated system of deducting TDS from withdrawals exceeding Rs. 1 crore. Most prominently, the ATMs where it is challenging to execute this act for concerned departments and even the banks.

Time Limit for Filing ITR Under Section 194N

If the entity withdrawing the amount has not yet filed the income tax returns for the previous three years, it calls for a higher TDS. In such circumstances, the due date for filing ITR is three years before the withdrawal date. However, if the income tax return filing date under Section 194N has not expired, it may apply for the particular assessment year.

The Bottom Line

Section 194N TDS of the Income Tax Act is one of the best steps the government can take to discourage the use of cash while promoting digital payments. Tax-paying individuals who file their income tax returns regularly can still withdraw up to Rs. 1 crore in cash without any TDS deduction. Nevertheless, they may withdraw extra cash if they have several accounts in varied banks.

Frequently Asked Questions

How do I exempt TDS on cash withdrawals?

You can exempt TDS on cash withdrawals for all withdrawals made by public or private sector banks, state or central government, cooperative banks, post offices and business correspondents of banks.

What is TDS under section 194N refund?

If you have made monetary declarations at the start of the year and are lower than your original investment proofs at the year's end, you are eligible for TDS under section 194N refund.

How do I claim my 194N TDS?

To claim your 194N TDS, you must only file your income tax returns in Forms ITR 2 or 3.

Which TDS is refundable?

Banks generally levy a basic 10% TDS on the accumulated interest. TDS is refundable for individuals belonging to the 5% tax bracket, where they can claim a TDS refund for the additional amount deducted.

How is the TDS refund calculated?

TDS refund is calculated based on the sum to be refunded through income consolidation from varied sources. The next step is assessing the tax payable on your total taxable income and calculating the difference between the tax payable on net taxable income and TDS or already-paid tax.

What are the 4 types of TDS return?

The 4 types of TDS returns are 24Q for TDS deduction from salaries, 26Q for TDS deduction from payments except for salaries, 27Q for tax deductions from dividends, interest or other amounts payable to non-residents and 27EQ for tax collection at source.

What are 24Q and 26Q returns?

24Q is a return filed and submitted for tax deducted at source on salary payments, while 26Q is the return filed on tax deducted at source on payments except for salaries.

Is TDS return mandatory?

Yes, the TDS return is mandatory for all government and corporate deductors under Section 206 of the Income Tax Act. Nevertheless, for the other deductors, filing the e-TDS return is optional.