Introduction
Every bank, co-operative bank or a post-office shall deduct tax at source from any sum paid in cash from one or more accounts maintained by the recipient. The tax shall be deducted at the rate of 2% or 5% as the case may be.
1.1. Deductor
Every banking company (including any bank or banking institution), co-operative bank or a post-office, which is responsible for payment of cash to a person, from one or more accounts maintained by him, shall be required to deduct tax under this provision. In other words, banks or post office shall deduct tax at source if cash is withdrawn above the threshold limit from any bank account (saving or current bank account) maintained by a person.
1.2. Deductee
Tax is required to be deducted in all the cases whether the deductee is a resident or non-resident.
1.3. Rate of TDS and threshold limit
1.3-1. If no default is made in filing of return
Tax is required to be deducted at the rate of 2%. The rate shall not be further increased by Surcharge and Health & Education Cess if sum is payable to a resident person. The rate of TDS shall be increased by the applicable surcharge and health & education cess if payee is a non-resident person or a foreign company. If deductee does not furnish his PAN to the deductor, the tax shall be deducted at the rate of 20% under Section 206AA.
The provision provides that the person responsible for paying any sum or aggregate of sum, in cash exceeding Rs. 1 crore (Rs. 3 crores where the recipient is a co-operative society) during the previous year, to any person shall, at the time of payment of such sum, deduct an amount equal to 2% of such sum as income-tax. The language used in Section 194N gives the following two interpretations with respect to the amount on which tax is required to be deducted:
(a) Tax to be deducted from the whole amount; or
(b) Tax to be deducted from the amount in excess of Rs. 1 crore or Rs. 3 crores, as the case may be.
The first view is far-fetched as it may cause many practical difficulties. The second view is more logical and also matches with the provision existed before its substitution by the Finance Act, 2020. Further, to substantiate that the second view is acceptable, we should consider the meaning of the following terms:
(a) Sum
(b) Exceeding
(c) Such Sum
The word 'sum' is generally used to convey the meaning of 'amount'. The Reader's Digest Great Encyclopaedic Dictionary gives one of the meanings of 'sum' as 'a quantity or amount of or of money'.
The term 'exceed' and the qualifying adjective like 'exceeding' are relative terms. It indicates going over or topping or over and above of what preceded or what is set as the basic standard or limit. It may be concluded that the 'sum' used under section 194N shall be treated as 'sum' 'over and above' Rs. 1 crore or Rs. 3 crores, as the case may be.
In New Webster's Dictionary and Thesaurus, the meaning of 'such' is given as something just mentioned (used to avoid the repetition of one word twice in a sentence). Thus, generally speaking, the use of the word 'such' as an adjective prefixed to a noun is indicative of the draftsman's intention that he is assigning the same meaning or characteristic to the noun as has been previously indicated or that he is referring to something which has been said before.
Therefore, for section 194N, 'such sum' should be taken as similar to 'sum' paid to a person. Consequently, it may be concluded that the tax shall be deducted only on the 'sum' which triggers the obligation to deduct tax, i.e., when the sum withdrawn exceeds the threshold limit of Rs. 1 crore or Rs. 3 crores. The first para of the Section contains three provisions – obligation to deduct tax, time of deduction and rate of TDS. The use of expression 'such sum' establishes that the time of deduction and the rate of TDS depends on the 'sum' which triggers the obligation to deduct tax. When obligation to deduct tax arises on crossing the threshold of Rs. 1 crore or Rs. 3 crores, the tax to be deducted only on the sum exceeding such threshold limit.
1.3-2. If a person defaults in filing of return
If a person has not filed return of income for all of the three assessment years immediately preceding the previous year in which cash is withdrawn, and the due date for filing the return under section 139(1) has expired, the tax shall be deducted at the rates specified in following sub-clauses (a) and (b):
(a) At the rate of 2% of the sum, if the aggregate of the amount withdrawn exceeds Rs. 20 lakhs during the previous year but does not exceed Rs. 1 crore (Rs. 3 crores where the recipient is a co-operative society);
(b) At the rate of 5% of the sum, if the aggregate of the amount withdrawn exceeds Rs. 1 crore (Rs. 3 crores where the recipient is a co-operative society) during the previous year.
The tax is deductible under the sub-clause (a) if the aggregate of the amount withdrawn during the previous year exceeds Rs. 20 lakhs but does not exceed Rs. 1 crore/Rs. 3 crores. The tax under the sub-clause (b) shall be deducted if the aggregate of the amount withdrawn during the year exceeds Rs. 1 crore or Rs. 3 crores, as the case may be. Where the payee is covered in sub-clause (b), that is, the amount or aggregate of the amount withdrawn exceeds Rs. 1 crore or Rs. 3 crores, the tax shall be deducted at the rate of 2% from the sum in excess of 20 lakhs but upto Rs. 1 crore/Rs. 3 crores and at the rate of 5% from the sum in excess of Rs. 1 crore or Rs. 3 crores, as the case may be.
Example, Mr. X withdraws the following sum in cash during the financial year 2021-2022 as follows:
Date | Amount withdrawn |
01-08-2021 | 10,00,000 |
15-09-2021 | 35,00,000 |
17-11-2021 | 25,00,000 |
28-01-2022 | 45,00,000 |
16-03-2022 | 30,00,000 |
He has not furnished his return of income for the previous year 2017-18, 2018-19 and 2019-20 and the due date for filing of return for such years has already expired.
Since Mr. X has not filed return of income for three assessments years immediately preceding the previous year in which cash is withdrawn, and the due date for filing the return under section 139(1) has expired, the tax shall be deducted as follows:
Date | Amount withdrawn | Aggregate of amount withdrawn | Tax Deducted at Source | ||
Rate | Computation | Tax to be deducted | |||
01-08-2021 | 10 lakhs | 10 lakhs | - | - | - |
15-09-2021 | 35 lakhs | 45 lakhs | 2% | [45 lakhs (-) 20 lakhs] * 2% | 50,000 |
17-11-2021 | 25 lakhs | 70 lakhs | 2% | 25 lakhs * 2% | 50,000 |
28-01-2022 | 45 lakhs | 115 lakhs | 2% and 5% | 30 lakh 2% + 15 lakh 5% | 1,35,000 |
16-03-2022 | 30 lakhs | 145 lakhs | 5% | 30 lakh * 5% | 1,50,000 |
These rates shall not be further increased by Surcharge and Health & Education Cess if sum is payable to a resident person. The rate of TDS shall be increased by the applicable surcharge and health & education cess if payee is a non-resident person or a foreign company. If deductee does not furnish his PAN to the deductor, the tax shall be deducted at the rate of 20% under Section 206AA.
The provisions of Section 206AB are not applicable if tax is required to be deducted under this provision. Section 206AB provides for deduction of tax at higher rate if the deductee has not furnished the return of income for a specified period.
1.4. How to check the return filing status?
The Department has provided a utility of "ITR Filing Compliance Check" on https://report.insight.gov.in which will be available to Scheduled Commercial Banks (SCBs) to check the IT Return filing status in bulk mode on basis of the PAN of the deductee.
1.5. Time of Deduction
The tax shall be deducted at the time of payment.
2. Exemption from TDS
2.1. Specified in the provision
No tax is required to be deducted from any sum paid or payable to following:
(a) The Government
(b) Any banking company or a co-operative bank or a post office
(c) Any business correspondent of a banking company or a co-operative bank in accordance with the RBI guidelines
(d) Any white label automated teller machine (ATM) operator of a banking company or a co-operative bank in accordance with the RBI Authorisation; or
(e) Any person specified by the Central Government. Further, Central Government is empowered to specify the reduced rate for deduction of tax under this provision.
2.1-1. Meaning of 'White Label ATM Operators'
ATMs are broadly classified into 2 categories on the basis of their ownership, location and service - Bank Owned ATMs or White Label ATMs.
ATMs set up, owned and operated by banks are classified as Bank Owned ATMs. While as ATMs set up, owned and operated by non-banks are classified as White Label ATMs. Non-bank operators have been authorised by the RBI under the Payment and settlement Act, 2007. In addition to cash dispensing, these ATMs provide various others services as well, inter-alia, cash deposits, bills payments, account information, etc.
2.1-2. Meaning of 'Business Correspondents'
Business Correspondents are retail agents engaged by banks for providing banking services at locations other than at bank branch/ATM. They render various services to the banks such as identification of borrowers, processing and submission of applications to banks, disbursal of small value credit, recovery of principal, collection of interest, collection of small value deposits, etc.
2.2. Notified by the Central Govt.
The Central Government has been empowered to specify the recipient in whose case this provision shall not apply or the tax shall be deducted at the reduced rate. Recipient is required to fulfil the conditions specified in the notification for claiming the benefit of this exemption or reduced rate. Following recipients have been notified by the Central govt. for the exemption from this provision:
2.2-1. Agencies related to the operation of ATMs
The Central Government has notified that the tax shall not be deducted under this provision from the cash withdrawn by the Cash Replenishment Agencies (CRA's) and franchise agents of White Label Automated Teller Machine Operators (WLATMO's). However, this exemption is available on fulfilment of the following conditions:
(a) Franchise agents of WLATMO's has maintained a separate bank from which withdrawal is made.
(b) Such withdrawal is made for the purpose of replenishing cash in the ATM's operated by the WLATMO's;
(c) The WLATMO has furnished monthly certificate to the bank that the bank account of the CRA's and the franchise agent of the WLATMO's have been examined; and
(d) The amount withdrawn from such bank account is reconciled with the amount of cash deposited in the ATMs of the WLATMO's.
2.2-2. Agents and Traders of APMC
The Central Government[8] has notified that the tax shall not be deducted under this provision from the cash withdrawn by the commission agents or traders, operating under Agriculture Produce Market Committee (APMC), registered under any law relating to Agriculture Produce Market of the concerned State. However, this exemption is available on fulfilment of the following conditions:
(a) The person has intimated its account number, through which he wishes to withdraw the cash in excess of Rs. 1 crore , along with his PAN to the banking company or co-operative society or post office;
(b) He has certified that the withdrawal is for the purpose of making payments to the farmers on account of purchase of agriculture produce; and
(c) The banking company, co-operative society or post office has ensured that necessary evidences are collected and placed on the record that the PAN quoted by him is correct and he is registered with the APMC.
2.2-3. Authorised dealers and Full-Fledged Money changer
The Central Government has notified that the tax shall not be deducted under this provision from the cash withdrawn by the authorised dealers and its franchise agent and sub-agent and Full-Fledged Money Changer (FFMC) licenced by the RBI and its franchise agent. However, this exemption is available on fulfilment of the following conditions:
(a) The person shall maintain a separate bank account from which withdrawal is made for the following purpose:
• Purchase of foreign currency from foreign tourists or non-residents visiting India or from resident Indians on their return to India, in cash as per the directions or guidelines issued by RBI; or
• Disbursement of inward remittances to the recipient beneficiaries in India in cash under Money Transfer Service Scheme (MTSS) of the RBI.
(b) It furnishes a certificate to the bank that the withdrawal is for the specified purpose only and the directions or guidelines issued by the RBI have been adhered to.
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