TDS on Cash Withdrawals of above 1 Crore from Sep'19

During Budget 2019, Finance Minister Nirmala Sitharaman had stated some clear and well-defined goals. Regarding the efforts made towards digitisation of payments she highlighted the various initiatives that the Government had taken in the recent past to promote digital payments and a cashless economy. To further promote digital payments, she proposed a slew of other measures.

2% TDS on cash withdrawals over Rs 1 crore explained

Of the proposed changes, some of which have come into effect from September 1, 2019, one that could have immense impact is contained under the new Section 194N of the Income Tax Act, 1961. This section says that: “No tax shall be deducted on the amount withdrawn in cash from any account – IF the amount withdrawn does not exceed Rs 1 crore during the previous year".

Simply put, this means that you will lose 2% TDS when withdrawing cash amounting to more than Rs 1 crore.

This Tax Deduction at Source is to be implemented when a withdrawal made by a single individual is more than the Rs 1 crore limit, within a financial year. This deduction can only be initiated by the financial institution from which the withdrawal has been made, such as a banking company, a co-operative bank or a post office. This rule applies to one or more accounts maintained by a recipient with a particular financial entity.

What happens when you exceed the withdrawal limit before August 31, 2019?

Let's say you have three accounts with HDFC Bank.

Between April 1, 2019, and August 31, 2019, you made cash withdrawals worth Rs 50 lakhs from each account.
Now,your withdrawal aggregate stands at Rs 1.5 crores within the same banking institution.
TDS will not be deducted at source until August 31,2019, even though you exceeded the Rs 1 crore limit.

What happens when you exceed the withdrawal limit after September 1, 2019?

Again, let’s assume you have three accounts with HDFC Bank.

After September 1, 2019, you made Rs 50 lakhs cash withdrawals from each account.
Within the same banking institution, the aggregate of your withdrawal stands at Rs 1.5 crores.
This amount has now exceeded the cash withdrawal limit of Rs 1 crore, making section Section 194N applicable to you.
HDFC Bank will deduct 2 % TDS on all future cash withdrawals from all three accounts.

The Tax Deduction at Source (TDS) will be applied on withdrawals made from September 1, 2019 onwards. The calculation of limits, on whether the person falls into the TDS required category will, however be made for the financial year 2019-20. This means that cash withdrawals made from April 1, 2019, till August 31, 2019, will be added up to calculate the threshold limit.

How 2% TDS on cash withdrawal impacts you?

As a layman, the new changes in the tax structure can be befuddling. Here are the answers to some common questions that are probably on your mind.

Will this be at an account, bank or PAN level?

The application of Section 194N will be per person and will aggregate an individual's accounts with a particular bank. If you have more than one account with the same bank where cash withdrawals exceed Rs 1 crore, Section 194N becomes applicable to you. However, if you have multiple accounts with different banks, and your cash withdrawal exceeds Rs 1 crore, you do not come under Section 194N. This is because it is the responsibility of the banking institution or post office to aggregate the cash withdrawals that customers make from them, via the same or different accounts. They can then deduct TDS at 2% when the cash withdrawal from them all surpasses the Rs 1 crore mark.

Is the change going to impact savings, current or overdraft accounts?

This change will impact accounts maintained by all entities with all financial institutions. It will impact savings accounts, current account and overdraft accounts. The limit was initially understood to be applied per account; but the Finance Ministry has since clarified then that it will be per person.

Will it be applicable for single or multiple accounts?

As per the clarification released by the Ministry of Finance on August 30, 2019, this will be applicable for multiple accounts within the same banking institution.

Will this change be implemented by selected banks or all banks?

Yes, all banks, including co-operative banks and post offices, will be implementing this change.

Who is going to be largely impacted by this decision? How will it impact start-ups?

This will mostly impact those people who transact in cash. There is some belief that a bearer cheque made out to a person will not be counted as a cash withdrawal by the person. But this is an interpretation and may lead to taxation issues. Start-ups will not be primarily affected unless they have large cash payments.

What do I do if the decision directly impacts me? What process will this change entail?

The ideal action that can be taken by those who will be impacted by this new provision under Section 194N is to try and digitise their payments. If this is not possible for you, then you can try to maintain accounts with different banking institutions for your withdrawals. To be clear, this is not the intent of the law, and further clarifications may be made in the future, that would make this solution redundant.

Is anyone exempt from this provision?

Payments made to the government, a banking company or co-operative society engaged in banking, as well as the business correspondent of a banking company or co-operative society engaged in banking and post office, are exempt from this Section 194N.

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This measure has been taken as an open push to discourage cash transactions as well as to move the economy towards digital payments. The ultimate goal is to reduce the circulation of cash in the economy since this allows transactions to escape taxation. This behavioural measure will encourage individuals to prevent their money from being deducted at the source. Despite being able to claim the amount later, most people will prefer to have control over their money, rather than have it deducted and then claimed, which may or may not happen.

Sources:

[N1]https://bclindia.in/budget-2019/#tds-on-cash-withdrawal

[N2]https://incometaxindia.gov.in/Lists/ASKITQA/AllItems.aspx?Paged=TRUE&p_Modified=20180508%2007%3A45%3A56&p_ID=2717&PageFirstRow=301&SortField=Modified&SortDir=Asc&&View=%7BA8896FBF-AE7F-4DCE-B3FA-3F1671F4503B%7D#InplviewHasha8896fbf-ae7f-4dce-b3fa-3f1671f4503b=SortField%3DModified-SortDir%3DAsc

[N3]https://pib.gov.in/newsite/PrintRelease.aspx?relid=192918

[N4]https://pib.gov.in/newsite/PrintRelease.aspx?relid=192918

[N5]https://taxguru.in/income-tax/section-194n-tds-cash-withdrawals.html

[N6]https://pib.gov.in/newsite/PrintRelease.aspx?relid=192918

[N7]https://taxguru.in/income-tax/section-194n-tds-cash-withdrawals.html

[N8]https://taxguru.in/income-tax/section-194n-tds-cash-withdrawals.html