Section 194 N Amendment In Finance Bill 2020

Amendments are made in Section 194 N in Finance Bill 2020 aiming to regulate the defaulters who have not filed the Income Tax Return for relevant to the three previous years. Section 194 N that was launched in Union Budget 2019 intended to restrict cash transaction in the country and promote the digital economy. Under this section, as proposed by Honourable Finance Minister, Nirmala Seetharaman in Budget 2019, any cash withdrawal exceeding INR 1 crore will have a compulsion of deduction of Tax at Source (TDS).

The new amendment in the section included in Finance Bill 2020 will be applicable from July 1, 2020.

Amendments Proposed in Section 194 N

Changes in Clause 84 of Finance Act 2020 give the latest amendments that are done in Section 194 N:

Scope of TDS on cash withdrawal is extended as

• 2% rate is deducted if the withdrawer has not filed IT Return for relevant to the three previous years. and withdrawal exceeds INR 20 lakh but less than INR 1 crore.

• 5% rate is deducted if the withdrawal is more than INR 1 crore.

Effective date of Amendment

Amendment of Section 194N will be with effect from 01 July 2020 .

Where Section 194 N Amendments are Applicable?

• Payers entitled to make TDS deduction u/s 194 N are the Financial Institutes, such as Bank (public or private), Co-Operative Bank and Post Office.
• TDS u/s 194 N tax should be applicable only when the aggregate amount of cash withdrawal during the previous year by a person from one or more of his bank or post office account, as the case may be, is more than INR 20 lakh and the concerned person has not filed IT Returns for the last three years. In this condition, compulsion of TDS is applicable on the withdrawal amount that exceeded INR 20 lakh.
• In case, in a FY, a taxpayer (financial institute) sanctions withdrawal to a taxpayer in intervals, the compulsion of TDS deduction as per 194 N will be applicable once the net amount is more than INR 1 crore in that FY. In this condition, compulsion of TDS is applicable only on the withdrawal amount that exceeded INR 1 crore.
• TDS deduction as per 194 N amendments by the concerned taxpayer will come for these withdrawers:
  • Individuals
  • HUFs
  • Company
  • Partnership Firm
  • LLP
  • Local Authority
  • Association of Person (AOP)
  • Body of Individual (BOI)
  •  
• TDS deduction as per 194 N amendments is NOT applicable for these withdrawers:
  • Government Bodies
  • Banks, including
  • Business Correspondents of a Banking Company
  • White-Label ATM operator of any Bank
  • Farmer, whom Central Government specifies the Commission Agent or Trader
  •  
• CBDT has exempted TDS deduction u/s 194 N on the cash withdrawal by the following entities:
  • Authorized dealer and its Franchise Agent/Sub-Agent
  • Full-Fledged Money Changer (FFMC) licensed by the Reserve Bank of India and its Franchise Agent

Clarifications Required On Crucial Issues

Filing of Income Tax Returns 

        The proof of filing the returns of income for all the 3 assessment years relevant to the 3 previous years.

Three Assessment Years Relevant to the Three Previous Years

• AY 2020-21 for the previous year 1-4-2019 to 31-3-2020.
• AY 2019-20 for the previous year 1-4-2018 to 31-3-2019.
• AY 2018-19 for the previous year 1-4-2017 to 31-3-2018.

To whom not Applicable

Cash Replenishment Agencies (CRA’s)

• Franchise agents of White Label Automated Teller Machine Operators (WLATMO’s) maintaining a separate bank account from which withdrawal is made only for the purposes of replenishing cash in the Automated Teller Machines (ATM’s) operated by such WLATMO’s.
• Registered commission agent or trader.
• operating under Agriculture Produce Market Committee (APMC) of the concerned state.
• The authorised dealer and its franchise agent and sub-agent.
• RBI-licensed Full-Fledged Money Changer (FFMC) and its franchise agent.

Following the conditions as stated above, TDS will be computed in this form:

Case 1:

If a withdrawer, who has not filed IT Return for three years, takes out cash for a FY (after July 1, 2020), in the form:

Bank ICICI:-  INR 12 lakh

Post Office:- INR 5 lakh

Bank HDFC:- INR 10 lakh

Net Withdrawal:   (INR 12 lakh + INR 5 lakh + INR 10 lakh)

                               = INR 27 lakh

Since the net withdrawal exceeds INR 20 lakh and less than INR 1 crore, the payer has to deduct 2% of INR 6 lakh (INR 27 lakh – INR 20 lakh), i.e. INR 14,000

Case 2:

If a withdrawer, who HAS filed IT Return on time, takes out the given cash, payer’s TDS compulsion will be:

• Of amount less than INR 1 crore (aggregate of all withdrawal) in a FY, NO TDS will be deducted u/s 194 N
• Of amount more than INR 1 crore (aggregate of all withdrawal) in a FY, i.e. suppose, INR 1.40 crore, TDS will be deducted u/s 194 N as 2% of INR 40 lakh (INR 1.40 crore – INR 1 crore) = INR 80,000 

Case 3:

If a withdrawer, who has not filed IT Return for three years, takes out INR 1.40 crore cash for a FY (after July 1, 2020), payer’s TDS compulsion will be:

TDS will be deducted u/s 194 N as 5% of INR 40 lakh (INR 1.40 crore – INR 1 crore) = INR 2,00,000. 

Also, Read: "Union Budget 2023: What To Expect & Where You Can Watch It Live". 

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