As per the amended law, if an individual withdraws cash exceeding Rs 20 lakh in an FY from his/her bank account and has not filed ITR during the last three financial years then TDS will be leviable at the rate of 2 percent on the amount of cash withdrawn.
If an individual has not filed income tax return (ITR) for the last three financial years, then cash withdrawal from his/her savings or current bank account will attract TDS if the total amount withdrawn in a financial year exceeds Rs 20 lakh.
This is because Budget 2020 had amended the scope of section 194-N of the Income-tax Act, 1961. As per the amended law, if an individual withdraws cash exceeding Rs 20 lakh in an FY from his/her bank account (current or savings) and has not filed ITR during the last three financial years then TDS will be leviable at the rate of 2 percent on the amount of cash withdrawn. Further, if the amount of cash withdrawn exceeds Rs 1 crore in the financial year, then TDS at the rate of 5 percent will be applicable on the amount of cash withdrawn in the case of the individual who has not filed ITR in the last 3 financial years.
The new law on TDS on cash withdrawal has come into effect from July 1, 2020.
Additionally, TDS of 2% on cash withdrawal is applicable if the amount withdrawn from a bank account exceeds Rs 1 crore in a financial year even if an individual has filed ITR. Had the individual not filed his/her ITR for the last three financial years, then TDS at the rate of 5 percent on the amount withdrawn exceeding Rs 1 crore would have been levied. This law had been introduced by the government in Budget 2019. The law was aimed at discouraging cash transactions and promoting digital transactions.
For instance, assume you withdraw Rs 25 lakh cash from your savings account in the FY 2020-21. However, ITR has not been filed by you for any of the three preceding financial years i.e. FY 2019-20, FY2018-19, and FY 2017-18. In such a case, the bank will deduct TDS at the rate of 2 percent on Rs 25 lakh i.e. Rs 50,000 from the amount of cash withdrawn.
The scope of Section 194N was substantially enhanced by the Finance Act, 2020. Earlier only a single TDS rate and single threshold limit were prescribed for deducting tax on cash withdrawal. Now, a banking co., or a co-op. bank or a post office is required to deduct tax at two different rates considering two different threshold limits. This situation arises when a person withdrawing cash falls under the first proviso to Section 194N. The general provisions of section 194N require deduction of tax at the rate of 2% if cash withdrawal exceeds Rs. 1 crore. The first proviso to Section 194N provides that if a person withdrawing cash has not filed return of income for three previous years, the tax shall be deducted at the rate of 2% on cash withdrawal exceeding Rs. 20 lakhs and 5% on cash withdrawal exceeding Rs. 1 crore.”
Under Section 194-N, a bank, co-operative bank and post office is required to deduct TDS on amount of cash withdrawn if it exceeds the threshold amount i.e. Rs 20 lakh (if no ITR filed for last three years) or Rs 1 crore (if ITR has been filed), as the case may be.
The e-filing website of the income tax department has introduced the facility to check whether the individual has filed ITR for the last three financial years or not and the rate of TDS leviable on the amount of cash withdrawn. Read here how banks will check if you have filed the last three ITRs.
Tax credit available on the TDS on cash withdrawn
An important thing which must be kept in mind that tax so deducted under section 194N shall not be treated as income of the person withdrawing cash. The Finance (No. 2) Act, 2019 has amended section 198 to provide that sum deducted under section 194N shall not be deemed as income. However, the tax so deducted on cash withdrawal can be claimed as credit at the time of filing of ITR.”
The Central Board of Direct Taxes (CBDT) in a notification dated September 27, 2019 has allowed the bank account holder (i.e., the individual in whose name the bank account is held) to get tax credit on the TDS but only for the financial year in which it has been cut.
Source: Economic Times, Income Tax India Website