Section 194N TDS on Cash Withdrawal New Rules for FY 2025-26

• Notification NO. 68/2019 (F.NO. 370142/12/2019-TPL)], DATED 18-9-2019 provides a specific exemption from TDS under Section 194N for Cash Replenishment Agencies (CRAs) and franchise agents of White Label Automated Teller Machine Operators (WLATMOs).

  Key Points:

  • Exemption from TDS: CRAs and franchise agents of WLATMOs are exempt from TDS under Section 194N when withdrawing cash for replenishing ATMs operated by the WLATMOs.
  • Conditions for Exemption:
    • The CRA or franchise agent must maintain a separate bank account exclusively for ATM cash replenishment.
    • The WLATMO must furnish a monthly certificate to the bank confirming that the CRA’s or franchise agent’s account has been examined and the withdrawn amount matches the cash deposited in the ATMs.
  • Effective Date: The exemption is deemed to have come into force on September 1, 2019.

  Rationale:

  • Avoids Double TDS: This exemption prevents CRAs and franchise agents from facing TDS on cash withdrawals meant solely for ATM replenishment, as the WLATMO would already be subject to TDS on their cash withdrawals.
  • Ensures Smooth ATM Operations: By exempting CRAs and franchise agents, the notification ensures smooth cash flow for ATM replenishment and avoids unnecessary TDS complications.

  Implications:

  • Reduced Compliance Burden: CRAs and franchise agents benefit from reduced TDS compliance burden and avoid the need to claim refunds.
  • Facilitates Cash Management: The exemption simplifies cash management for WLATMOs and their partners.

  Important Notes:

  • Separate Bank Account: It’s crucial for CRAs and franchise agents to maintain a dedicated bank account for ATM cash replenishment to avail of this exemption.
  • Monthly Certification: WLATMOs need to ensure timely submission of the monthly certificate to the bank to comply with the exemption conditions.

  NOTIFICATION NO. 123/2024/F. NO. 275/39/2021-IT(B)], DATED 28-11-2024 brings an important exemption under Section 194N of the Income-tax Act, 1961

Key Points:

• Exemption from TDS: Foreign representations, including diplomatic missions, UN agencies, international organizations, consulates, and offices of honorary consuls, are now exempt from TDS under Section 194N.
• Legal Basis: This exemption is granted based on the powers conferred by the fifth proviso to Section 194N, which allows the Central Government to specify exemptions in consultation with the Reserve Bank of India.
• Effective Date: The exemption is deemed to have come into force on December 1, 2024.
• Conditions for Exemption: The exemption applies to entities that are:
  • Duly approved by the Ministry of External Affairs.
  • Exempt from paying taxes in India as per the Diplomatic Relations (Vienna Convention) Act 1972 and the United Nations (Privileges and Immunities) Act 1947.

Implications:

• No TDS on Cash Withdrawals: These foreign representations can now withdraw cash from their bank accounts in India without TDS being deducted, regardless of the amount.
• Facilitates Operations: This exemption simplifies financial operations for these entities, as they no longer need to worry about TDS on cash withdrawals or claiming refunds.
• Promotes International Relations: By exempting these entities, India reinforces its commitment to facilitating smooth diplomatic relations and international cooperation.

Important Notes:

• Documentation: Banks might still require these entities to provide necessary documentation to prove their eligibility for the exemption.
• Specific Guidelines: Banks and foreign representations should refer to any circulars or guidelines issued by the relevant authorities for detailed implementation instructions.

Examples of Section 194N TDS

Different scenarios with varying withdrawal amounts and ITR filing statuses:

1. Scenario: An individual who has filed ITR for the past three years withdraws a total of ₹90 lakh in cash from their bank account during the financial year.

   • TDS Calculation: Since the withdrawal amount is less than ₹1 crore, no TDS will be deducted.

2. Scenario: A cooperative society has filed ITR and withdraws ₹3.5 crore in cash.

   • TDS Calculation: TDS will be deducted at 2% on ₹50 lakh (₹3.5 crore – ₹3 crore).

3. Scenario: An individual who has not filed ITR for the past three years withdraws ₹40 lakh in cash.

   • TDS Calculation: TDS will be deducted at 2% on ₹20 lakh (₹40 lakh – ₹20 lakh).

4. Scenario: An individual who has not filed ITR for the past three years withdraws ₹1.75 crore in cash.

   • TDS Calculation: TDS will be deducted at 2% on ₹80 lakh (₹1 crore – ₹20 lakh) and at 5% on ₹75 lakh (₹1.75 crore – ₹1 crore).

5. Scenario: An individual has accounts in two different banks. They have filed ITR. They withdraw ₹70 lakh from Bank A and ₹60 lakh from Bank B.

   • TDS Calculation: No TDS will be deducted. The ₹1 crore limit applies per bank.

6. Scenario: An individual has accounts in two different banks. They have not filed ITR. They withdraw ₹15 lakh from Bank A and ₹30 lakh from Bank B.

   • TDS Calculation: TDS will be deducted only for the withdrawal from Bank B. Since the withdrawal from Bank A is less than ₹20 lakh, no TDS will be deducted. For Bank B, TDS will be deducted at 2% on ₹10 lakh (₹30 lakh – ₹20 lakh).

7. Scenario: A business correspondent of a banking company withdraws ₹2 crore in cash.

   • TDS Calculation: No TDS will be deducted as business correspondents are exempt under Section 194N.

Cash Withdrawal from Saving Account and Current Accounts of Same Bank

Facts:

• Withdrawal: ₹20 Lakh from Savings Account + ₹20 Lakh from Current Account = ₹40 Lakh total
• Bank: Same bank (SBI)
• ITR Filing: No returns filed in the last 3 years

Section 194N TDS Example: Multiple Account Withdrawals

Key Takeaways:

• Because the individual has not filed ITRs for the past three years, the lower ₹20 Lakh threshold applies.
• The withdrawals from both the Savings and Current Accounts are aggregated since they are from the same bank (SBI).
• TDS of ₹40,000 will be deducted by SBI.

Cash Withdrawal from Saving Account and Current Accounts of Different Banks

Facts:

• Withdrawal: ₹20 Lakh from Savings Account of SBI + ₹20 Lakh from Current Account of ICICI  = ₹40 Lakh total
• Bank: SBI Bank and ICICI Bank
• ITR Filing: No returns filed in the last 3 years

Section 194N TDS Example: Multiple Banks

Key Takeaways:

• Even though the total withdrawal is ₹40 Lakh, it is split between two different banks.
• The ₹20 Lakh threshold applies per bank due to non-filing of ITR.
• Since neither bank individually crosses the threshold, no TDS will be deducted.

Important Note: This highlights how maintaining accounts with multiple banks can impact TDS under Section 194N, especially for those who haven’t filed ITR in the past 3 years.

Cash Withdrawal from Joint Account 

• Account Type: Joint Savings Account held by two individuals (A and B)
• Withdrawal: ₹30 Lakh withdrawn in cash
• ITR Filing:
  • A has filed ITR for the last 3 years
  • B has not filed ITR for the last 3 years

Analysis:

• Whose ITR matters? This is where it gets tricky. The law doesn’t explicitly address joint accounts.
• Possible Interpretations:
  • Stricter: The bank may apply the stricter rule (non-filer) to the entire withdrawal, leading to TDS on ₹10 Lakh.
  • Proportionate: The bank might apply TDS proportionately based on each holder’s share and ITR filing status. This would be more complex to calculate.
• Practical Approach: Banks often take the cautious approach and deduct TDS assuming the stricter rule.

Why this is important:

• Awareness: Joint account holders need to be aware of this potential issue.
• Planning: If one holder hasn’t filed ITR, consider filing it to avoid higher TDS.
• Communication: Clear communication with the bank is crucial to understand their TDS deduction policy for joint accounts.

This is where things get a bit more complex! The application of Section 194N to Non-Resident Indian (NRI) accounts depends on several factors, and the rules have evolved over time.

General Rule:

• As per the current provisions (amended up to FA 2024), Section 194N generally applies to NRI accounts as well. This means that if an NRI withdraws cash exceeding the specified limits (₹1 crore or ₹20 lakh, depending on ITR filing), TDS will be applicable.

Exceptions and Considerations:

• Specific Exemptions: The Central Government, in consultation with the RBI, can notify exemptions for certain categories of recipients, which may include NRIs. It’s crucial to check for any specific notifications that might exempt NRIs or provide for reduced TDS rates.
• Residential Status: The residential status of the NRI (RNOR or RNRI) can impact tax liability and TDS applicability.
• Source of Income: The source of the funds in the NRI account (income earned in India or abroad) can also be a factor.
• DTAA: If there’s a Double Taxation Avoidance Agreement (DTAA) between India and the NRI’s country of residence, the provisions of the DTAA might override the domestic TDS provisions.¹
• Repatriation: If the cash withdrawal is for repatriation of funds, specific RBI regulations and FEMA guidelines will also apply.

Practical Challenges:

• Determining Applicability: It can be challenging for banks to determine the exact TDS applicability for NRI accounts due to the various factors involved.
• Documentation: NRIs might need to provide additional documentation to prove their residential status, source of income, etc., to claim exemptions or lower TDS rates.
• Tax Implications: NRIs need to be aware of the tax implications of cash withdrawals and plan accordingly to minimize their tax burden.

Recommendations:

• Consult a Tax Advisor: For NRIs, it’s highly advisable to consult a tax advisor specializing in NRI taxation to understand the TDS implications and ensure compliance with all relevant regulations.
• Check for Updates: Tax laws and regulations are subject to change. NRIs should stay updated on the latest rules related to cash withdrawals and TDS.

Form 15G/H cannot be used to avoid TDS under Section 194N.

Here’s why:

• Purpose of Form 15G/H: These forms are used to declare that your income is below the taxable limit and hence, no TDS should be deducted on certain incomes like interest, dividends, or rent.¹
• Section 194N is Different: This section deals specifically with TDS on cash withdrawals exceeding specified limits. It’s not related to the nature of your income or whether it’s taxable.
• No Provision for Form 15G/H: The law governing Section 194N doesn’t include any provision for using Form 15G/H to avoid TDS.

Therefore, even if you submit Form 15G/H, the bank is still obligated to deduct TDS under Section 194N if your cash withdrawal exceeds the applicable threshold.

Alternatives to Avoid TDS:

• File ITR: If you’re eligible for a lower TDS threshold (₹1 crore) by filing ITR, ensure you file your returns regularly.
• Reduce Cash Withdrawals: Consider using digital payment methods or other alternatives to minimize cash withdrawals and avoid exceeding the threshold.

Important Note: Always consult with a tax advisor if you have complex tax situations or are unsure about the TDS rules. They can provide personalized guidance based on your specific circumstances.