Do you know how much tax you have to pay if you withdraw more than Rs 1 crore in cash from your bank account in a year? Or if you distribute income to your shareholders or partners in cash? If you are not aware of the answers, you may be in for a surprise.
The government of India has introduced two new sections in the Income Tax Act, 1961, namely Section 194N and Section 194NF, to discourage cash transactions and promote digital payments. These sections impose tax deduction at source (TDS) on certain cash withdrawals and income distributions made by taxpayers.
In this blog post, we will explain what these sections are, who they apply to, how they affect your tax liability, and what are the exceptions and exemptions under them. We will also discuss the impact of these sections on different categories of taxpayers and the benefits and challenges of these sections for the taxpayers and the government.
What is Section 194N?
Section 194N was introduced by the Finance Act, 2019, and came into effect from September 1, 2019. This section applies to any person who withdraws cash exceeding Rs 1 crore in aggregate from one or more accounts maintained with a bank, a co-operative bank, or a post office in a financial year.
The person who makes the cash withdrawal is liable to pay TDS at the rate of 2% on the amount exceeding Rs 1 crore. For example, if a person withdraws Rs 1.5 crore in cash from a bank account in a financial year, the TDS will be Rs 1 lakh (2% of Rs 50 lakh).
The person who is responsible for paying the cash to the person who withdraws it (such as the bank, the co-operative bank, or the post office) is required to deduct the TDS and deposit it with the government. The person who withdraws the cash can claim the credit of the TDS against his or her tax liability.
The TDS under Section 194N is applicable to all types of taxpayers, such as individuals, Hindu Undivided Families (HUFs), firms, companies, trusts, etc. However, there are some exceptions and exemptions under this section, which we will discuss later.
What is Section 194NF?
Section 194NF was introduced by the Finance Act, 2020, and came into effect from July 1, 2020. This section applies to any person who distributes income to its shareholders or partners in cash, such as a company that pays dividends or a partnership firm that pays profits.
The person who receives the income in cash is liable to pay TDS at the rate of 10% on the amount of income. For example, if a company pays Rs 10 lakh as dividend in cash to a shareholder, the TDS will be Rs 1 lakh (10% of Rs 10 lakh).
The person who is responsible for paying the income in cash to the person who receives it (such as the company or the partnership firm) is required to deduct the TDS and deposit it with the government. The person who receives the income in cash can claim the credit of the TDS against his or her tax liability.
The TDS under Section 194NF is applicable to all types of taxpayers who receive income in cash, such as individuals, HUFs, firms, companies, trusts, etc. However, there are some exceptions and exemptions under this section, which we will discuss later.
Also Read: Section 194C TDS on Payment to Contractor: A Complete Guide
Who is affected by these sections?
The introduction of these sections has a significant impact on the cash transactions and income distributions of different categories of taxpayers. Let us see how these sections affect some of the common categories of taxpayers.
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Individuals and HUFs: These taxpayers may have to pay TDS under Section 194N if they withdraw cash exceeding Rs 1 crore from their bank, co-operative bank, or post office accounts in a financial year. They may also have to pay TDS under Section 194NF if they receive income in cash from a company or a partnership firm, such as dividends or profits. These taxpayers can claim the credit of the TDS against their tax liability, but they may face cash flow issues due to the deduction of tax at source. They may also have to file their income tax returns to claim the refund of excess TDS, if any.
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Businesses: These taxpayers may have to pay TDS under Section 194N if they withdraw cash exceeding Rs 1 crore from their bank, co-operative bank, or post office accounts in a financial year. They may also have to deduct TDS under Section 194NF if they pay income in cash to their shareholders or partners, such as dividends or profits. These taxpayers may face operational challenges due to the compliance burden of deducting and depositing the TDS. They may also have to incur additional costs of maintaining records and filing returns for the TDS. They may also have to deal with the queries and grievances of their shareholders or partners regarding the TDS.
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Trusts and Funds: These taxpayers may have to pay TDS under Section 194N if they withdraw cash exceeding Rs 1 crore from their bank, co-operative bank, or post office accounts in a financial year. They may also have to deduct TDS under Section 194NF if they pay income in cash to their beneficiaries or contributors, such as interest or donations. These taxpayers may face difficulties in meeting their objectives and obligations due to the reduction of cash availability and liquidity. They may also have to comply with the reporting and filing requirements of the TDS.
What are the exceptions and exemptions under these sections?
There are some cases where these sections do not apply or where the taxpayers can claim relief or deduction from the TDS. These are:
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Government, banks, and co-operative banks: These entities are exempt from paying TDS under Section 194N on their cash withdrawals from their own accounts. They are also exempt from deducting TDS under Section 194NF on their income distributions in cash to their shareholders or partners.
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Farmers: These taxpayers are exempt from paying TDS under Section 194N on their cash withdrawals from their bank, co-operative bank, or post office accounts, if they furnish a declaration in Form 60 along with their PAN or Aadhaar number. They are also exempt from paying TDS under Section 194NF on their income received in cash from a company or a partnership firm, if they furnish a declaration in Form 15G or 15H along with their PAN or Aadhaar number.
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Lower or nil TDS certificate: These taxpayers can apply to the income tax authorities for a lower or nil TDS certificate under Section 197 of the Income Tax Act, 1961, if their estimated tax liability is lower than the TDS amount. If they obtain such a certificate, they can pay TDS at a lower or nil rate under Section 194N or Section 194NF, as the case may be.
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Other exemptions: There are some other exemptions under these sections for certain categories of taxpayers, such as political parties, local authorities, hospitals, educational institutions, etc. These taxpayers can refer to the relevant provisions of the Income Tax Act, 1961, and the Income Tax Rules, 1962, for more details.
Also Read: Section 194J TDS on Professional or Technical Fees: Everything You Need to Know
In a Nutshell
Section 194N and Section 194NF are the new sections in the Income Tax Act, 1961, that impose TDS on certain cash withdrawals and income distributions made by taxpayers. These sections are aimed at discouraging cash transactions and promoting digital payments, as well as widening the tax base and increasing the tax revenue.
These sections affect different categories of taxpayers in different ways, depending on their cash transactions and income distributions. These taxpayers need to be aware of the applicability, impact, and compliance of these sections, and also the exceptions and exemptions under them.
