Cash Withdrawals or Cash deposits and its implications as per Income Tax

Cash transactions have always been the major component of Indian economy before the introduction of banking systems. With the regulatory mechanisms of the banks, cash transactions became an escape path for people trying to hide their actual income and evade the tax. In order to promote transperancy in business, government of India started putting stringent restrictions on cash trasactions in businesses. People hoarding cash of substantial limits were put under the radar of income tax department. Money laundering became a common term of use when it came to topics of discussion about cash transactions. In this article, we have explained implications of cash deposits and cash withdrawals as per current market scenarios.

Limits for Cash Deposits:
Income tax departments have put certain limits on cash deposits in banks. Depositing an amount exceeding Rs.10 lakh in a single or combined financial year attracts attention from the Income Tax Department. Any cash deposit transactions exceeding Rs.10 lakhs in a financial year across all your savings accounts is duly reported to the Income tax department. The Central Board of Direct Taxes (CBDT) requires banks to report such transactions. One may face scrutiny notices from the department if such amount exceeds Rs.10Lakhs. High-value transaction reporting portal promptly reflects your substantial transactions in cash such as making credit card bill payments in cash of more than Rs.1Lakh or making any purchase of high value in cash etc.

Limits for Cash Withdrawals:
If cash deposits are to face such stringent compliances, then it is obvious that the cash withdrawals will have additional measures for compliances. Income Tax Department has notified a Section 194N to apply TDS on cash withdrawals.

According to section 194N of the Act, TDS has to be deducted if a person withdraws in cash any amount in a particular FY if it exceeds :

  • ₹ 20 lakh (if no ITR has been filed for all the three previous AYs), or
  • ₹ 1 crore (if ITRs have been filed for all or any one of three previous AYs).

Rate of applicable TDS under section 194N:

  • cash withdrawals in excess of ₹ 1 crore if the person withdrawing the cash has filed income tax return for any or all three previous AYs. :- TDS @2%
  • cash withdrawals of more than ₹ 20 lakh where, the person withdrawing the cash has not filed ITR for any of the preceding three AYs. :- TDS @2%
  • cash withdrawals exceeding ₹ 1 crore where, the person withdrawing the cash has not filed ITR for any of the preceding three AYs. :- TDS @5%

Exceptions under section 194N i.e. in case of following persons no TDS is to be deducted if cash withdrawals exceed the specified limits:

  • Central or state government
  • Private or public sector bank, co-operative bank or post office
  • Business correspondent of any bank
  • White label ATM operator of any bank  
  • Central government specified commission agents or traders operating under Agriculture Produce Market Committee (APMC) for making payment to the farmers on account of purchase of agriculture produce
  • RBI Authorised dealers, their agents and sub-agents who are full-fledged money changers
  • Any other person notified by the Government in consultation with RBI.

Income tax laws are framed in India to monitor legal usage of funds and to avoid any kind of illegal activity like money laundering, havala or terror-financing etc., which may hamper Indian economy in and adverse way. When the cash transactions are monitored frequently and strictly, then such issues may be addressed properly. Levying of TDS on certain transactions leads to government having an eye over the activities happening in the economy. At the same hand, Income tax department have exempted certain persons from such provisions keeping in mind their nature of activities.

About Author:

CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.

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