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TDS on Cash Withdrawal: Limits and Exemptions Explained

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Understanding TDS on cash withdrawal is crucial for small and micro-sized businesses to ensure compliance with tax regulations and avoid unnecessary deductions. Section 194N of the Income Tax Act mandates the deduction of tax at source on cash withdrawals exceeding specified limits. 

This article delves into the details of TDS 194N, including its applicability, rates, exemptions, and the process for claiming refunds.

What is Section 194N of the Income Tax Act?

Section 194N was introduced to promote digital transactions and curb the use of unaccounted cash. It mandates that banks and post offices deduct TDS on cash withdrawal when the total cash withdrawn by an individual or entity exceeds certain thresholds in a financial year.

TDS 194N: Applicability and Threshold Limits

Section 194N applies to all individuals, Hindu Undivided Families (HUFs), and entities withdrawing cash from their accounts. The TDS on cash withdrawal limit is determined based on the individual's compliance with filing Income Tax Returns (ITRs) in the previous three assessment years.

1. For Individuals or Entities Who Have Filed ITRs

  • Threshold Limit: ₹1 crore in a financial year.
  • TDS Rate: 2% on the amount exceeding ₹1 crore.

2. For Individuals or Entities Who Have Not Filed ITRs

  • Threshold Limit: ₹20 lakh in a financial year.
  • TDS Rate:
    • 2% on the amount exceeding ₹20 lakh but not exceeding ₹1 crore.
    • 5% on the amount exceeding ₹1 crore.

It is important to note that the TDS on cash withdrawal limit is calculated per bank or post office. For instance, if you have accounts in multiple banks, the limit applies individually to each bank. 

Therefore, withdrawing ₹1 crore from each bank would not attract TDS under Section 194N.

194N TDS Rate: Understanding the Deduction

The 194N TDS rate varies based on the withdrawal amount and the individual's tax compliance history. As detailed earlier, the rates are:

  • 2% for withdrawals exceeding ₹1 crore, if ITRs have been filed for the last three assessment years.
  • 5% for withdrawals exceeding ₹1 crore, if ITRs have not been filed for the last three assessment years.

These rates are applicable to the amount exceeding the specified threshold. 

For example, if ₹1.2 crore is withdrawn, the TDS will be calculated on ₹20 lakh (₹1.2 crore - ₹1 crore).

TDS on Cash Withdrawal Limit: Key Considerations

The key considerations in accordance with TDS on cash withdrawal limit are as follows:

  • Multiple Accounts: The limit applies per bank or post office.
  • Cumulative Withdrawals: All cash withdrawals from a particular bank or post office are aggregated to determine the TDS applicability.
  • ITR Filing Status: Your ITR filing status in the last three assessment years determines the applicable TDS rate.

Section 194NF of the Income Tax Act: Clarification

There is no Section 194NF in the Income Tax Act. The correct reference is Section 194N, which pertains to TDS on cash withdrawal. Ensure to refer to the correct section to avoid confusion.

Is 194N TDS Refundable or Not?

Yes, the 194N TDS is refundable. If the total TDS deducted exceeds your actual tax liability, you can claim a refund. To do so, file your Income Tax Return (ITR) for the relevant financial year, and the excess TDS will be refunded or adjusted against future tax liabilities.

Cash Withdrawal Limit from Bank as per the Income Tax Act

The cash withdrawal limit from the bank, as per income tax, is determined by the thresholds specified in Section 194N. As discussed, the limits are ₹20 lakh and ₹1 crore, depending on your ITR filing status. These limits apply to the total cash withdrawn from a particular bank or post office in a financial year.

Cash Withdrawal Limit from Current Account as per Income Tax

The cash withdrawal limit from a current account, as per income tax, is the same as that for savings accounts. The thresholds under Section 194N apply to the cumulative cash withdrawals from all accounts held with a particular bank or post office.

How to Avoid TDS Deduction under Section 194N

To avoid TDS deduction under Section 194N:

  • File ITRs: Ensure timely filing of your Income Tax Returns for the last three assessment years.
  • Maintain Records: Keep track of your cash withdrawals and ensure they do not exceed the specified limits.
  • Digital Transactions: Encourage digital payments to reduce the need for large cash withdrawals.

How GimBooks Can Help Small and Micro-Sized Businesses

Managing TDS on cash withdrawal and other tax compliance matters can be confusing for small and micro-sized businesses. And this is where GimBooks comes in to make your financial management easier.

  • Simplified BookkeepingGimBooks offers an easy-to-use cloud-based platform that helps you keep track of all your transactions, including cash withdrawals. It helps you monitor when you are approaching the cash withdrawal limit from the bank as per the Income Tax Act and plan your transactions accordingly.
  • Integrated Banking Features With Integrated Banking, GimBooks helps you link your bank accounts directly to the software. It means all your withdrawals and deposits are automatically recorded, giving you a clear picture of your cash flow and making it easier to stay within limits under Section 194N.
  • GST and Tax ComplianceGimBooks ensures your tax compliance stays up to date. The platform helps you calculate TDS, track your TDS 194N deductions, and prepare your returns. It reduces the chance of errors and makes claiming a 194N TDS refundable amount much simpler when needed.
  • User-Friendly InterfaceYou don’t need to be an accounting expert to use GimBooks. The platform is built for simplicity, so small business owners can easily manage invoicing, bookkeeping, and tax compliance in one place.
  • Mobile First SolutionGimBooks is designed for use on mobile devices, making it convenient for business owners who are always on the go. Whether you need to check your cash withdrawal limit from your current account as per income tax, create invoices, or track expenses, you can do it from your phone anytime, anywhere.

Using GimBooks means you can focus on running your business while the platform helps you manage your compliance, including important rules like Section 194N of the Income Tax Act.

Final Thoughts

Understanding TDS on cash withdrawal is essential for small and micro-sized businesses to manage their finances effectively. By adhering to the provisions of Section 194N, businesses can avoid unnecessary deductions and ensure compliance with tax regulations. 

Regular filing of Income Tax Returns and maintaining accurate records are key practices to manage TDS obligations efficiently.

To know more, explore GimBook’s informative blog section!

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FAQs

1. What is TDS on cash withdrawal, and when is it applicable?

TDS on cash withdrawal is a tax deducted at source when an individual or entity withdraws cash exceeding certain limits from a bank or post office. It is applicable under Section 194N of the Income Tax Act when the total cash withdrawn exceeds ₹1 crore (if ITRs are filed) or ₹20 lakh (if ITRs are not filed) in a financial year.

2. What is the current rate for TDS on cash withdrawal under Section 194N?

The 194N TDS rate is generally 2% for withdrawals exceeding ₹1 crore if Income Tax Returns are filed regularly. If ITRs are not filed for the last three years, the rate increases to 5% on amounts exceeding ₹1 crore.

3. Is the TDS on cash withdrawal refundable?

Yes, TDS on cash withdrawal is refundable. If the total TDS deducted is higher than your actual tax liability, you can claim a refund by filing your Income Tax Return (ITR) for that financial year.

4. How can small businesses avoid TDS deduction on large cash withdrawals?

Small businesses can avoid TDS on cash withdrawal by ensuring they file Income Tax Returns for the last three years, keeping withdrawals under the prescribed limits, and preferring digital payments over large cash withdrawals.

5. Does the TDS on cash withdrawal limit apply to both savings and current accounts?

Yes, the cash withdrawal limit from a current account, as per income tax, is the same as for savings accounts. The limits under Section 194N apply cumulatively to all cash withdrawals from a particular bank or post office in a financial year.