Do you pay taxes? It is imperative to pay taxes for the smooth functioning of the system. In almost all developed countries, every citizen is liable to pay taxes. This reminds me of today’s topic, TDS on cash withdrawal.
According to the revised budget, the TDS limit for withdrawing cash has been reduced to Rs. 20 Lakhs. Moreover, this scheme applies to taxpayers but did not issue an income tax return for several years. Therefore, if they withdraw more than Rs. Twenty lakhs, 2% of TDS applies to the person.
In 2019, Section 194N was introduced; According to this, the payer had to pay TDS on Rs. 1 Crore cash withdrawal. Moreover, this section was thriving in stopping the substantial cash payments. However, it won’t help to encourage people to pay taxes. Therefore, a new and revised form of TDS on cash withdrawal has been introduced.
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What is TDS? What does TDS on Cash withdrawal mean?
Tax deduction at source, aka TDS, is a medium through which the government has all the rights to collect tax from its citizens. Government can collect tax on several valuable possessions like property, profit distribution and income. Property tax applies to every landowner to their government. Moreover, if the property is on sale, the buyer and seller are liable to pay taxes. However, the seller will only pay for the time they possess the property. Afterwards, it will all transfer to the buyer or new landowner.
Similarly, another TDS applicable section is profit distribution. For example, suppose you run a big firm with several shareholders. Therefore, if you make any profit, it will get distributed among the shareholders. Such income is termed Dividend income. Moreover, according to the Tax Act 1961, paying tax over the dividend income for the company and shareholders is mandatory.
Also, TDS on income is applicable on a specific threshold limit which we will discuss in detail.
Moreover, The payer needs to deduct the tax to pay the source before transferring the amount to the payee. There are specific provisions under the Tax Act 1961. According to these provisions, a certain percentage of tax gets deducted before completing any payment.
Similarly, a certain amount of TDS gets deducted while making a cash withdrawal exceeding the limit of Rs.1 crore. The payer will deduct this money before making payments to the payee in a financial year if it exceeds the threshold limit. This is what we call TDS or tax deduction on cash withdrawals. When the threshold limit exceeds Rs. 20 Lakhs, 2% of the total amount, is deducted as TDS.
Moreover, if the threshold limit exceeds Rs. 1 crore, 5% of the total amount is deducted as TDS.
Section 194N: Introduction.
During a financial year, If the cash withdrawal limit exceeds one crore, section 194N is applied. This section applies to cash withdrawals from the payer to the payee in a financial year. Any taxpayer such as a citizen, individual, LLPs, A company or organisation, a public or private bank, a post-office, A community or an association etc., are liable to pay tax under this section.
However, only 2% of the TDS is applicable for deduction if an individual has filed for ITR for Income TAX return. Therefore, it is essential to file for an ITR in these three years. You can file it any of these three year. Only, it should be done asap as the financial year passes.
Let us take a few examples to understand better:-
Suppose, You have three bank accounts, and you withdraw Rs. 1 crore for each account as cash making it Rs. Three crores in total. In this case, the TDS is not applicable! Yes, you heard it right! Always remember that TDS is applicable when cash withdrawal from a certain bak exceeds this limit. In this case, the bank is liable to deduct the TDS.
Now, suppose, if a taxpayer account holder issues a cheque to any third party which exceeds the Rs.1 crore, will the bank deduct the tax from the account holder’s account?
In this case, the bank will not subtract the tax amount from the account holder’s account. Instead, the third party who receives the cheque will be liable to pay the share of tax during a financial year.
On the other hand, the business payment through bearer cheque should not exceed Rs. 10,000/day under section 40(A)(3).
Moreover, the TDS under section 194 will be applicable on payments during the financial year 2019-20. Also, it only applies to the withdrawals made between Sep 2019-20 for over and above Rs.1 crore.
Now, the question is, what is the need for section 194N under the Union Budget?
This section became part of the Union Budget on 5 July 2019.
As we are all aware that the whole world is now changing its direction towards digitalisation. It is because of digitalisation; we can do everything online. From buying a needle to buying a Tesla, you can order it just by clicking a few buttons on your phone.
Similarly, the government introduced section 194N to minimise cash withdrawals. However, there is no TDS on transferring money online. Thus, the main reason behind this is that the government wants to promote digitalisation.
Under section 194N, A public, private and co-operative bank and post-office are the central bodies responsible for TDS deduction.
Furthermore, there are certain bodies on which the provisions of this section are not applicable.
For example, Almost all Government bodies, a person who has government liberty not to pay, few co-operative banks etc.
Some exceptional conditions for TDS deduction under the section 194N
The payer will deduct the TDS while making a cash withdrawal for Rs. 1 crore and above during a financial year. Moreover, suppose the payee starts withdrawing money at regular intervals and its sum reaches above Rs.one crore within the financial year. In that case, the bank is liable to deduct some percentage of funds as per the terms and conditions.
Furthermore, what if an individual withdraws Rs 98 lakhs as a total during the financial year. After That, an additional amount of Rs. 2,50,000 during the same financial year. In this case, the TDS will be applicable on the extra 50,000 only.
TDS on cash withdrawal rate under this section
During a financial year, If there is a withdrawal of more than Rs 1 crore, the payer needs to deduct TDS at the rate of 2%. That means, if we take the above example under consideration, then under section 194N, TDS on Rs. 50,000 will be 2%. Therefore, the Tax deduction for 50,000 is Rs 1,000.
But it is necessary to note that this 2% rate is only applicable if the payee has the ITR for three years.
However, if the payee did not file for the ITR for three years, this TDS threshold limit will decrease. The TDS will now be applicable over transactions for Rs. 20 lakhs. All the transactions above Rs. 20 lakh are liable for TDS at the rate of 2%.
Furthermore, the TDS rate on cash withdrawals above one crore is 5% without income-tax return.
Some important things to remember:
- Under section 194N, no cash recipient has the liberty to claim for form 15G/15H to get the TDS amount lower.
- Under section 139, if the return date does not expire when calculating the cash withdrawals for three years immediately, the assessment year will remain out of the picture.
As per the government laws, this act became effective on 5 July 2019 on an immediate basis. Moreover, according to this 1961 Income Tax law, the payer pays tax at the source before paying the recipient. Furthermore, the amount is applicable for deduction according to the fixed rate mentioned under section 194N.
Tax deduction plays an essential role during tax audits conducted by CBDT(Central Board of direct taxes).
The payer also needs to file a quarter returns report to CBDT. Moreover, this report will prove that the TDS will deduct as per the government laws subject to clearing.
Conclusion: TDS on cash withdrawal
It is crucial to note that the TDS act is actual. Therefore, every individual must obey the rules and work accordingly. Moreover, to file an Income tax return is very important to file during the three consecutive years. This will assist you in saving lots of money. If you fail to do so, you will experience losing lots of money as tax. Therefore, the knowledge of the TDS rate of TDS cash withdrawal is fundamental. In the end, we wrote this article today, hoping that you learned something new today and you will work on it. Thank you for your time. Take care and be safe!