The government is planning to increase income tax compliance and discourage the use of cash. To realise this purpose, the income tax department has updated the Tax Deducted at Source (TDS) rules associated with cash withdrawals from banks and post offices starting this month.
Until the previous month, a TDS of 2% applied to cash withdrawals exceeding Rs.1 crore per year. However, the TDS net has been widened now. The TDS rate will entirely depend on whether you have filed income tax returns (ITR) over the last three years for high-value cash transactions of up to Rs.20 lakh in a financial year.
As specified in the new Section 194N of the Income Tax Act 1961, TDS of 2% is applied on cash withdrawals above Rs.1 crore if you have filed ITR for the last three years. Withdrawals from banks, co-operative societies, and post offices are considered for this calculation. TDS, in this case, applies only to the excess amount withdrawn above Rs.1 crore during the year.
In the case where PAN is not linked to the bank account, a higher TDS of 20% is chargeable under Section 206AA of the Income Tax Act. Only if you have linked PAN and filed ITR for the last three years, TDS is not chargeable up to the limit of Rs.1 crore.
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If you are someone who has not filed ITR over the last three years, the TDS rates applicable are higher, i.e.
- Cash withdrawals up to Rs.20 lakh—No TDS
- Cash withdrawals between Rs.20 lakh and Rs.1 crore—TDS@2%
- Cash withdrawals beyond Rs.1 crore—TDS@5%
Your bank may ask you to submit ITR-V of the last three years to verify if you qualify for this facility. On the other hand, you can also ask your bank to check the applicable TDS rate on the income tax department’s e-filing portal. A tool has been provided on the site to determine the TDS rate under Section 194N.
Though the new TDS rules came to force from 1 July 2020, the laws apply to all the cash withdrawals made starting from 1 April 2020, the beginning of the financial year 2020-2021.
For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in
