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Section 194N

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Tax Deducted at Source (TDS) is income tax reduced from the money paid at the time of making specified payments such as rent, commission, professional fees, salary, interest etc. by the persons making such payments. Usually, the person receiving income is liable to pay income tax. But the government with the help of TDS provisions makes sure that income tax is deducted in advance from the payments being made by you. The recipient of income receives the net amount (after reducing TDS). The recipient will add the gross amount to his income and the amount of TDS is adjusted against his final tax liability. The recipient takes credit of the amount already deducted and paid on his behalf.

In case of cash withdrawals of more than INR 1 crore in a financial year, TDS under section 194N is applicable. This section applies to all the sum of money or an aggregate of sums withdrawn from a particular payer in a financial year.

The section will apply to withdrawals made by any taxpayer including:

  • An Individual
  • A Hindu Undivided Family (HUF)
  • A company
  • A partnership firm or an LLP
  • A local authority
  • An Association of Person (AOPs) or Body of Individuals (BOIs)

The following payers are covered under this section

  • Any bank (private or public sector)
  • A co-operative bank
  • A post office

The tax will be deducted by the payer while making payment to any individual in cash from a taxpayer’s bank account on the amount in excess of INR 1 crore.The limit of INR 1 crore in a financial year is with respect to per bank or post office account and not a taxpayer’s individual account. The cash withdrawal made by any taxpayer from the bank accounts maintained by such recipient will only attract TDS under Section 194N.In the case of a payment made by a taxpayer through a bearer cheque issued to third party, in excess of INR 1 crore in a financial year, the recipient of the cash is not the account holder, but a third party. In such a case, the payment is not made by the bank to the account holder.

In the above situation, there is an ambiguity that whether such bearer cheque given to any person (like vendor) to collect payment from the bank will be covered under section 194N.Whether the bank is liable to deduct tax on the funds of the account holder in respect of the bearer cheque issued to third party.

Separately, in case of business payments, payment made through a bearer cheque would not be allowed as an expenditure under section 40 (A)(3) of the income tax act. Any payment made exceeding INR 10,000 per day (in a single transaction or in aggregate) is not allowed as business expenditure. The limit of INR 1 crore will be applicable to the cash payments / withdrawals made during the FY 2019-20. The provisions of Section 194N will be applied to the payments made on or after 1 September 2019.

Why was it introduced?
This section was introduced in order to discourage cash transactions in the country and promote the digital economy.

Who will deduct TDS under this Section?
The person (payer) making the cash payment will have to deduct TDS under Section 194N. Here is the list of such persons:

  • Any bank (private or public sector)
  • A co-operative bank
  • A post office

There are certain categories of person (payee) to whom the provision of this section will not apply. They are listed below: <ul”>

  • Any government body
  • Any bank including co-operative banks
  • Any business correspondent of a banking company (including co-operative banks)
  • Any white label ATM operator of any bank (including co-operative banks)

Rate of TDS under this Section
The payer will have to deduct TDS at the rate of 2% on the cash payments / withdrawals of more than INR 1 crore in a financial year under Section 194N. Thus, in the above example, TDS would be on INR 50,000 at 2% i.e. INR 1,000.

If you are looking for any assistance regarding filing of TDS returns, tax returns, tax assessments and tax audits, our team of experts can assist you in complying with the tax regime.

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