Section 194N – TDS on Cash Withdrawal
Section 194N mandates that banks, co-operative societies, and post offices deduct TDS when aggregate cash withdrawals from an account exceed ₹1 crore in a financial year, with a higher rate applicable to persons who have not filed income tax returns.
Inserted by the Finance Act 2019 and later amended to add a penal dimension for non-filers, Section 194N is primarily a surveillance and compliance tool aimed at curbing large unaccounted cash transactions in the Indian economy. The basic provision requires any banking company, co-operative society engaged in banking, or post office to deduct TDS at the rate of 2% on cash withdrawals exceeding ₹1 crore in aggregate from one or more accounts maintained by a person during a financial year.
The Finance Act 2020 introduced a significant amendment targeting individuals who have not filed income tax returns for the preceding three assessment years. For such non-filers, the TDS threshold is reduced to ₹20 lakh, and the applicable TDS rate is 2% on withdrawals between ₹20 lakh and ₹1 crore, and 5% on withdrawals exceeding ₹1 crore. This creates a strong incentive for individuals — especially small business owners, traders, and proprietors who traditionally relied on heavy cash transactions — to ensure their ITR filing history is current.
The TDS deducted under Section 194N is not a final tax; it is a prepaid tax that can be claimed as credit while filing the income tax return. For businesses that are legitimately cash-intensive, such as grocery wholesalers, kirana distributors, or cash-and-carry retailers, this means their working capital temporarily deployed as TDS credit must be tracked carefully on Form 26AS and the Annual Information Statement (AIS).
An important operational note is that the ₹1 crore threshold applies per bank and is cumulative across all accounts (savings, current, overdraft, and cash credit) held by the same PAN at that bank. Cash withdrawals from different banks are treated separately and do not aggregate for this purpose. This distinction has practical implications for businesses that maintain accounts across multiple banks.
Section 194N has generated significant compliance activity among banking correspondents, cooperative credit societies, and large cash-disbursement entities such as chit funds. For individual assessees, particularly senior citizens in rural areas or persons operating in largely cash-based trades, this section serves as a nudge towards digital financial behaviour and formal ITR filing compliance.