The TDS (Tax Deducted at Source) limit for cash withdrawals from a current account is ₹1 crore (Rupees One Crore) in a financial year. If the total cumulative cash withdrawals exceed this amount, TDS becomes applicable on the amount exceeding ₹1 crore.
This provision primarily falls under Section 194N of the Income Tax Act, 1961, designed to discourage large cash transactions and promote a digital economy.
Understanding Section 194N and its Application
Section 194N mandates that financial institutions (banks, cooperative banks, post offices) deduct TDS when an individual or entity withdraws cash exceeding a specified limit from their account, including current accounts.
- Payer: The financial institution (bank, co-operative bank, post office).
- Payee: The individual or entity making the cash withdrawal.
The deduction is triggered when the cumulative cash withdrawals by a payee from one or more accounts held with a financial institution surpass the threshold within a financial year (April 1st to March 31st).
Key Thresholds for TDS on Cash Withdrawals
The TDS rate and limit depend on whether the recipient has filed their Income Tax Returns (ITR) for the preceding three assessment years.
| Scenario | Cumulative Cash Withdrawal Limit (Financial Year) | TDS Rate (on excess amount) |
|---|---|---|
| For payees who have filed ITR for the preceding three assessment years | ₹1 crore | 2% |
| For payees who have NOT filed ITR for the preceding three assessment years | ₹20 lakh | 2% (on amount > ₹20 lakh) |
| ₹1 crore | 5% (on amount > ₹1 crore) |
Example:
If a business operating a current account has consistently filed its ITRs and withdraws ₹1.2 crore in cash over a financial year, TDS will be deducted on ₹20 lakh (₹1.2 crore - ₹1 crore) at 2%.
Practical Implications for Current Account Holders
Current accounts are frequently used by businesses for their daily operations, which often involve significant cash transactions. This TDS provision has several implications:
- Monitoring Withdrawals: Businesses and individuals need to meticulously track their cumulative cash withdrawals to avoid unexpected TDS deductions.
- Promoting Digital Transactions: The regulation encourages entities to opt for digital payment methods like NEFT, RTGS, IMPS, UPI, or cheques for transactions exceeding the threshold, thereby reducing reliance on physical cash.
- Cash Flow Management: Companies relying heavily on cash for expenses or payments might need to reconsider their financial strategies to stay within the prescribed limits or account for the TDS deduction.
- Compliance: Financial institutions have systems in place to track withdrawals and deduct TDS automatically once the limit is breached. It is the responsibility of the account holder to ensure their tax filing status is updated with the bank to avoid higher TDS rates.
Who is Exempt from Section 194N?
Certain entities are exempt from TDS under Section 194N, regardless of the cash withdrawal amount:
- The Government
- Any banking company or co-operative society engaged in carrying on the business of banking
- Any post office
- Any white label ATM operator
- Certain business correspondents of banking companies
- Commission agents/traders registered with APMC for specific purposes
How to Minimize TDS Impact
For businesses and individuals with high cash flow needs, consider these strategies:
- Utilize Digital Payment Modes: Prioritize online transfers, card payments, and other cashless methods for transactions wherever possible.
- Strategic Withdrawal Planning: Spread out large cash withdrawals over different financial years if feasible, or ensure withdrawals do not exceed the annual limit unnecessarily.
- Regular ITR Filing: Always file your Income Tax Returns on time to benefit from the higher ₹1 crore threshold and avoid the 5% TDS rate applicable for non-filers on amounts above ₹1 crore.
- Communicate with Bank: Ensure your bank has accurate records of your PAN and ITR filing status.
By understanding these regulations, current account holders can manage their cash transactions efficiently and ensure compliance with tax laws. For detailed guidance, it is advisable to consult the official Income Tax Department website or a tax professional.
