What is TDS Section 194N Under Income Tax Act?
TDS Section 194N is applicable if cash withdrawals of more than Rs 1 crore during a financial year. This section applied to all the sum of money or an aggregate of sums withdrawn from a in a financial year.
The section will apply to withdrawals made by any taxpayer including:
· An Individual & 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 deducted by the Bank while paid cash from a taxpayer’s bank account on the amount in excess of Rs 1 crore.
The limit of Rs 1 crore in a financial year is with respect to per bank or post office account and not a taxpayer’s individual account. For example, a person having three bank accounts with three different banks, he can withdraw cash of Rs 1 crore * 3 = Rs 3 crores without any TDS.
The cash withdrawal made by any taxpayer from the bank accounts maintained by such recipient will only attract TDS under Section 194N. For instance, if a bank makes a cash payment of more than Rs 1 crore in an FY to its account holder (i.e. any taxpayer) from the account maintained by such taxpayer, then the bank will have to deduct TDS.
In the case of a payment made by a taxpayer through a bearer cheque issued to third party, in excess of Rs 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 Rs 10,000 per day (in a single transaction or in aggregate) is not allowed as business expenditure.
The limit of Rs 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 is TDS Section 194N introduced?
The government has introduced Section 194N in the Union Budget 2019 proposed on 5 July 2019. In order to discourage cash transactions in the country and promote the digital economy, ‘Section 194N – TDS on cash withdrawals over and above Rs 1 crore’ has been introduced through the Finance Bill, 2019.
Who will deduct TDS under Section 194N?
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:
· 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)
· Any other person notified by the government
What is the main point of TDS under Section 194N?
TDS will be deducted by the payer while making the cash payment over and above Rs 1 crore in a financial year to the payee. If the payee withdraws a sum of money on regular intervals, the payer will have to deduct TDS from the amount, once the total sum withdrawn exceeds Rs 1 crore in a financial year. Further, the TDS will be done on the amount exceeding Rs 1 crore. For example, if a person withdraws Rs 99 lakh in the aggregate in the financial year and in the next withdrawal, an amount of Rs 1,50,000 is withdrawn, the TDS liability is only on the excess amount of Rs 50,000.
Rate of TDS under Section 194N
The payer will have to deduct TDS at the rate of 2% on the cash payments/withdrawals of more than Rs 1 crore in a financial year under Section 194N. Thus, in the above example, TDS would be on Rs 50,000 at 2% i.e. Rs 1,000.
Can I claim the credit of TDS deducted u/s 194 N?
Since the implementation of Section 194N has recently been made effective hence there is no practical clarity on the matter. Different opinions are being taken up for claiming of credit of TDS deducted u/s 194N.
As per opinion of majority you can validly claim credit/refund of TDS deducted u/s 194N while filing your Income Tax Return. The support for this opinion can be found in the fact that the TDS amount is reflected in 26AS and hence can be validly claimed.
On the other side since the law has made the use of words Levy of TDS and no levy like surcharge or cess can be claimed as a refund. Hence, some opine that the credit of TDS deducted u/s 194N cannot be claimed.