Section 194N - TDS Implications on Cash Withdrawal

Introduction

In India, cash is still king for many sectors, especially agriculture, construction, and wholesale trading. However, the government has been on a relentless mission to move the country towards a "less-cash" economy. To discourage large cash transactions and track the flow of black money, the Finance Act introduced a specific provision that hits you right at the bank counter: Section 194N.

Unlike other TDS sections that apply to income (like salary or commission), Section 194N applies to the mere act of withdrawing your own money. If you walk into your bank and withdraw cash exceeding a certain limit, the bank will deduct a percentage of it as tax.

For 2025, the rules have become even more targeted, especially with different limits for compliant taxpayers versus non-filers. If you are a business owner accustomed to withdrawing wages in cash or a trader paying farmers, ignoring this section can lock up 2% to 5% of your working capital in government coffers. In this guide, we will decode the complex slab structures of Section 194N and how you can plan your withdrawals to stay compliant.

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Table of Contents

1. What is Section 194N?
2. The Dual Threshold: ₹20 Lakh vs ₹1 Crore
3. TDS Rates: How Much Will Be Deducted?
4. The "Co-operative Society" Update (₹3 Crore Limit)
5. Who is Liable to Deduct TDS?
6. Who is Exempt from Section 194N?
7. How to Check Your TDS Deduction Status
8. Is TDS on Cash Withdrawal Refundable?
9. Special Rules for Agriculture Mandis
10. FAQs

What is Section 194N?

Section 194N mandates that a banking company, a co-operative society engaged in banking, or a post office must deduct TDS on cash withdrawals made by any person from their accounts, provided the amount exceeds a specific threshold in a financial year.

The key takeaway here is that the tax is on the withdrawal, not on the expense. Even if you are withdrawing money for a legitimate business purpose, the TDS applies if you cross the limit.

The Dual Threshold: ₹20 Lakh vs ₹1 Crore

The threshold limit for Section 194N is not uniform for everyone. It depends entirely on your tax compliance history. This is the government's way of penalizing those who do not file their returns.

Category A: The Compliant Taxpayer

If you have filed your Income Tax Returns (ITR) for the previous three assessment years, the limit is generous.

• Threshold: ₹1 Crore.
• Rule: TDS is deducted only if cash withdrawals exceed ₹1 Crore in the financial year.

Category B: The Non-Filer

If you have not filed your ITR for the previous three assessment years (for which the time limit to file under section 139(1) has expired), the limit is drastic.

• Threshold: ₹20 Lakhs.
• Rule: TDS kicks in as soon as your withdrawals cross ₹20 Lakhs.

TDS Rates: How Much Will Be Deducted?

The rate of deduction corresponds to the category you fall into.

For Compliant Taxpayers:

• Withdrawals > ₹1 Crore: TDS @ 2% on the amount exceeding ₹1 Crore.

For Non-Filers:

• Withdrawals > ₹20 Lakhs but < ₹1 Crore: TDS @ 2%.
• Withdrawals > ₹1 Crore: TDS @ 5%.

Example: If you are a non-filer and you withdraw ₹1.5 Crore in a year:

• On first ₹20 Lakhs: Nil.
• On next ₹80 Lakhs (up to 1 Cr): 2% = ₹1.6 Lakh.
• On remaining ₹50 Lakhs (> 1 Cr): 5% = ₹2.5 Lakh.
• Total TDS: ₹4.1 Lakh.

The "Co-operative Society" Update (₹3 Crore Limit)

A significant relief was provided in the recent Union Budgets, which is fully applicable for FY 2025-26.

For Co-operative Societies, the threshold limit for cash withdrawal without TDS has been increased from ₹1 Crore to ₹3 Crore.

• This is a massive boost for rural co-operatives and milk societies that deal in heavy cash volumes daily.
• Condition: The recipient must be a co-operative society. If a co-op withdraws cash, TDS applies only above ₹3 Crore at the rate of 2%.

Who is Liable to Deduct TDS?

The responsibility to deduct tax lies with the financial institution where you hold the account. This includes:

1. Any Public or Private Sector Bank.
2. Any Co-operative Bank.
3. Any Post Office.

The limit of ₹1 Crore (or ₹20 Lakh) applies to the aggregate cash withdrawn from all accounts maintained with that specific bank.

• Note: If you have three accounts in HDFC Bank, the limit applies to the total of all three. But if you have one account in HDFC and one in SBI, the limits apply separately to each bank.

Who is Exempt from Section 194N?

The government has exempted certain entities from this provision because their business model inherently requires cash handling. No TDS is deducted if the cash is withdrawn by:

1. The Government (Central or State).
2. Banks, Co-operative Banks, or Post Offices (Inter-bank transfers).
3. Business Correspondents (BCs) of banks.
4. White Label ATM Operators (who need cash to replenish ATMs).
5. Agriculture Produce Market Committee (APMC) commission agents (subject to specific notifications).
6. Authorized Dealers/Money Changers licensed by RBI.

How to Check Your TDS Deduction Status

Banks often struggle to know if a customer has filed ITRs for the last 3 years. To solve this, the Income Tax Department provides a verification tool.

1. Log in to the Income Tax E-filing portal.
2. Go to "Verification of Applicability u/s 194N".
3. Enter the PAN of the person withdrawing cash and their mobile number.
4. The system will generate a message stating whether the person is a "TDS Deductee at a higher rate" (Non-filer) or a normal rate.

Is TDS on Cash Withdrawal Refundable?

Yes, absolutely.

Section 194N TDS is not a final tax; it is an advance tax. The amount deducted will reflect in your Form 26AS.

When you file your Income Tax Return at the end of the year, this amount is treated as "Tax Paid."

• If your final tax liability is ₹50,000 and the bank deducted ₹2 Lakhs under 194N, you will get a refund of ₹1.5 Lakhs.
• However, this blocks your cash flow until the refund is processed.

Special Rules for Agriculture Mandis

Farmers and commission agents (Arhatiyas) in Mandis deal in crores of cash. To prevent hardship, the government issued a notification stating that commission agents or traders operating under the Agriculture Produce Market Committee (APMC) Act can withdraw cash without a TDS limit, provided:

• They have filed their returns for the last 3 years.
• They furnish their PAN to the bank.
• The cash is used for making payments to farmers for agricultural produce.