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Indian Taxation
Feb 15, 2024

How Section 194N and 194NF Affect Your Cash Withdrawals and Income Distribution

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Ankit Virani

CEO

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Ever Wondered About Tax on Cash Withdrawals Over ₹1 Crore? Here’s What You Need to Know!

At Suvit, we’re committed to simplifying complex financial regulations for businesses and individuals alike.

One area that often causes confusion is the tax rules around large cash withdrawals and cash income distributions.

Did you know that withdrawing more than ₹1 crore in cash from your bank account in a year could attract taxes? Or that distributing cash income to shareholders or partners can lead to surprise deductions?

If this is news to you, don’t worry—you’re not alone!

In an effort to reduce cash transactions and promote digital payments, the Indian government has introduced two key sections in the Income Tax Act, 1961: Section 194N and Section 194NF.

These laws bring tax deduction at source (TDS) into the picture for cash withdrawals and income distributions made in cash.

Let’s break it down in a way that’s easy to understand, so you can stay on top of your finances and avoid any unexpected taxes.

What’s Section 194N All About?

Think of Section 194N as a rule designed to keep a check on large cash withdrawals. Introduced in 2019, it applies to anyone who takes out more than ₹1 crore in cash from their bank, co-operative bank, or post office in a financial year.

Here’s how it works: If you withdraw over ₹1 crore, you’ll have to pay TDS at 2% on the amount exceeding ₹1 crore. So, for example, if you take out ₹1.5 crore in a year, TDS will be ₹1 lakh (which is 2% of the ₹50 lakh over the ₹1 crore threshold).

The responsibility of deducting this TDS falls on the bank or financial institution. They’ll collect it before handing over the cash. Don’t worry, though—if you’re eligible, you can claim this TDS as credit when you file your tax return.

And yes, this applies to everyone—whether you’re an individual, business, or trust. But don’t fret, there are a few exceptions, which we’ll get into later.

So, What’s Section 194NF?

Now, Section 194NF is all about cash income distributions. This section was introduced in 2020, and it’s aimed at companies or partnerships that distribute income in cash, like dividends or profits.

If you’re a recipient of this cash, you’re on the hook for TDS at 10% of the income received.

For example, if a company pays ₹10 lakh as a cash dividend to a shareholder, the TDS would be ₹1 lakh. Like with Section 194N, the company or partnership distributing the cash will deduct the TDS and deposit it with the government.

And again, the person receiving the income can claim this TDS credit when filing their taxes.

Also Read: Section 194C TDS on Payment to Contractor: A Complete Guide

Who’s Impacted by These Rules?

These rules affect a variety of taxpayers, including individuals, businesses, trusts, and funds. Let’s explore how different groups are impacted:

For Individuals and HUFs

If you’re an individual or part of a Hindu Undivided Family (HUF), you might need to pay TDS under Section 194N if your annual cash withdrawals exceed ₹1 crore.

Additionally, if you receive income in cash from a company or partnership (like dividends or profits), you’ll also have to account for TDS under Section 194NF.

While you can claim the TDS as credit, the cash flow hit might still sting! You may also need to file your tax return to get back any excess TDS.

For Businesses

Businesses face a dual burden. They may need to pay TDS under Section 194N for large cash withdrawals and also deduct TDS under Section 194NF if distributing income in cash.

The compliance load—managing records, deducting, depositing, and filing returns—can feel like an operational headache. But these rules are meant to encourage a shift toward digital transactions, which can ultimately benefit businesses in the long run.

For Trusts and Funds

Trusts may need to navigate both sections, especially if they pay cash income to their beneficiaries or contributors. Cash flow can become a real issue for them, and the TDS compliance may make their objectives harder to achieve.

Are There Any Exceptions or Loopholes?

Yes, there are a few exceptions under these sections:

  • Government Entities, Banks, and Co-Operative Banks

    These organizations are exempt from TDS on their own cash withdrawals or income distributions. They don’t have to worry about these rules at all!

  • Farmers

    Farmers are exempt from TDS under Section 194N if they submit Form 60 along with their PAN or Aadhaar. Similarly, they’re also exempt from Section 194NF if they provide Form 15G or 15H.

  • Lower or Nil TDS Certificate

    If you expect your tax liability to be lower than the TDS amount, you can apply for a lower or nil TDS certificate under Section 197. If approved, you can pay TDS at a reduced rate—or not at all.

  • Other Exemptions

    There are additional exemptions for political parties, local authorities, hospitals, educational institutions, and more.

How Do These Sections Affect You?

Now that we’ve broken down the basics, it’s time to think about how these sections impact you. If your business or personal life involves large cash withdrawals or receiving cash income, staying compliant with these rules is crucial.

Not only will this help you avoid penalties, but it can also encourage a transition to digital payment methods—a win-win for both you and the government in promoting transparency and efficiency.

Embracing the Benefits of Digital Payments

While these sections might seem like just another compliance hurdle, there’s a bigger picture. They’re part of the government's drive to reduce reliance on cash and promote digital transactions.

This shift is crucial for the economy as it helps curb tax evasion, improves record-keeping, and fosters a more transparent financial system.

Also Read: Section 194J TDS on Professional or Technical Fees: Everything You Need to Know

Stay Informed and Prepared!

Understanding Section 194N and Section 194NF isn’t just about avoiding surprise deductions—it’s about embracing a more transparent, efficient way to manage finances.

By keeping cash transactions within limits and leaning towards digital payments, you’ll be on the right side of compliance while also enjoying the benefits of modern financial practices.

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