Beginning July 1, higher tax deducted at source (TDS) rates will apply on cash withdrawals for individuals who do not file their income tax return (ITR), as part of the Finance Act 2020. This is in a bid to crack down individuals who despite falling in the taxable category do not file ITR and also to deter cash transactions.
TDS Rules On Cash Withdrawal If The Person Has Not Filed ITR
1. For those who have not filed ITR for last 3 financial years and withdraw a sum of over Rs 20 lakh but less than Rs. 1 crore from the bank in a fiscal year then TDS at the rate of 2% shall apply.
2. If the amount withdrawn is over Rs. 1 crore in a financial year then TDS at the rate of 5% will be deducted under Section 194N of the Income-tax Act, 1961.
In July 2019, the centre via Section 194N for the first time introduced TDS at the rate of 2% for cash withdrawals above Rs. 1 crore in a fiscal year. And this remains applicable even now. So, regardless of whether an individual has filed ITR or not, TDS implication shall still be there on cash withdrawals above Rs. 1 crore in a FY.
Few Important Pointers To Note On TDS On Cash Withdrawal
1. TDS liability on cash withdrawal shall arise only when the total cash withdrawal by the individual from one or more of his bank accounts in a FY exceeds Rs. 20 lakh or Rs. 1 crore.
2. Tax will be deducted only on the amount exceeding the specified thresholds.
3. Furthermore, if the person does not furnish his or PAN, then a higher TDS rate of 20% shall apply.
4. Also, the threshold limit applies to all bank accounts with the same bank. And for accounts maintained with different banks, the limit on cash withdrawal for TDS liability will apply separately.
Say if A has filed ITR and withdraws up to Rs. 1 crore in a FY then no TDS implication shall arise.
And if he withdraws a sum over Rs. 1 crore then TDS at the rate of 2% shall apply. Considering, he has withdrawn the amount of Rs 1.25 crore in 2 transactions of Rs. 75 lakh and Rs. 50 lakh, then TDS will only be charged on the amount over and above the threshold i.e. Rs. 25,000, threshold being Rs. 1 crore.
In the second example if the person has not filed his ITR for last 3 FYs and withdraws from bank a sum of between Rs. 20 lakh to Rs. 1 crore then 2% TDS shall apply. And if the amount withdrawn is above Rs. 1 crore then 5% TDS will apply.
Hence to avoid such TDS implication one should restrict cash withdrawal to the minimum possible and engage more in digital transactions.