Section 194N – Cash Withdrawal, Rate & TDS Rules

Key Takeaways

1. Section 194N applies to large cash withdrawals, where banks deduct TDS automatically once yearly limits are crossed, not the account holder.
    
2. Regular income tax filers face lower TDS rates, while non-filers and PAN defaulters attract higher deductions on cash withdrawals.
    
3. Some organisations, such as government bodies, banks, and RBI-approved institutions, are exempt, so their transactions continue smoothly without compliance hassles.

 Banks deduct tax on large cash withdrawals because of Section 194N. This rule helps monitor big cash withdrawals, promotes digital payments, and ensures taxes are properly collected.

Section 194N requires banks, co-operative banks, and post offices to deduct TDS on large cash withdrawals. Think of it like a security scanner at an airport, small bags pass freely, but big ones are checked. The check depends on how compliant the traveller is.

Let’s say Ravi withdrew ₹1.4 crore in cash from his bank during the year. Since he regularly files his income tax returns, the bank deducts 2% TDS on the excess amount before handing over the cash, without Ravi doing any calculation himself.

What Is Section 194N of the Income Tax Act?

Section 194N of the Income Tax Act requires banks, cooperative banks, and post offices to deduct TDS on cash withdrawals made by a person from one or more accounts. The deduction applies when withdrawals exceed the prescribed limit and is charged at 2% or 5%, depending on whether the person is a regular income tax filer or not.

Who Is Required to Deduct Tax Under Section 194N?

Under Section 194N, the responsibility to deduct tax does not fall on the person withdrawing cash. It lies with the institution handing over the cash. Simply put, the moment cash leaves the counter, TDS comes into play.

Entities required to deduct TDS:

• Banks (scheduled banks and banking institutions)
• Co-operative banks
• Post offices

When is TDS deducted?

• At the time of cash payment, not later
• Applies to withdrawals from one or multiple accounts of the same person

Let’s understand it with the help of this small table
 

Let’s understand it with the help of an example

Rohit withdraws ₹1.5 crore in cash during the year from different branches of the same bank. Once he crosses the threshold, the bank automatically deducts TDS before handing over cash. Rohit doesn’t calculate anything; the bank does it instantly.

Cash may be yours, but TDS is deducted before it reaches your hands.

Rate of TDS and Withdrawal Limits Under Section 194N

Think of Section 194N like a cash-withdrawal speed breaker. If you withdraw too much cash, TDS slows you down.

Case 1: You regularly file your income tax return
 

• TDS rate: 2%
   
• When it applies:
  • Cash withdrawals above ₹1 crore in a year
  • ₹3 crore limit if the recipient is a co-operative society
     
• Extra charges:
  • No surcharge or cess for resident individuals
  • Surcharge and cess apply if the payee is a non-resident
     
• No PAN given?
  • TDS jumps straight to 20%

Case 2: You have not filed returns for the last 3 years
 

(₹3 crore limit for co-operative societies)

Let’s understand it with the help of an example

Amit withdraws ₹1.2 crore in cash in one year.

• If he files returns: 2% TDS
• If he hasn’t filed returns: 5% TDS

The more compliant you are, the less tax you lose upfront.

Exemption from TDS under Section 194N

Section 194N does not apply to every cash payment. To ensure smooth functioning of the banking system and government operations, the law clearly lists certain recipients where no TDS is required, even if large cash amounts are involved.

TDS is not deducted when cash is paid to:

• The Government, since it is outside the tax collection net
• Banks, co-operative banks, and post offices, as they are regulated financial institutions
• Business correspondents of banks or co-operative banks, as permitted under RBI guidelines
• White-label ATM operators authorised by the RBI, who manage cash dispensing infrastructure
• Any person notified by the Central Government, based on policy needs

The Central Government has the power to notify a reduced TDS rate for specified persons, where full deduction may cause operational difficulties.
If cash movement supports public finance, banking operations, or RBI-regulated infrastructure, Section 194N steps aside.

How to Check the Return Filing Status

To help banks apply the correct TDS rate under Section 194N, the Income Tax Department has made the return-filing status easy to verify through an official online utility.

Banks do not need to guess whether a person has filed their income tax returns. The department provides a dedicated tool called “ITR Filing Compliance Check” that allows quick and accurate verification using PAN details.

Steps to check return filing status:

1. Visit the ITR Filing Compliance Check utility on the Insight portal
    
2. Log in as a Scheduled Commercial Bank (SCB)
    
3. Upload PAN details of the deductees in bulk mode
    
4. The system automatically shows whether returns were filed for the required years
    
5. Use this status to apply the correct TDS rate under Section 194N

This facility ensures correct TDS deduction, fewer errors, and smooth compliance, helping banks and taxpayers avoid higher tax deductions due to incorrect assumptions.

Conclusion

Section 194N is an easy-to-understand rule meant to keep track of big cash withdrawals. When someone withdraws a large amount of cash, tax is deducted automatically. The rule clearly tells who will deduct the tax, how much will be deducted, when it applies, and who doesn’t have to pay it. If you file your income tax returns on time and use your PAN properly, you can avoid higher deductions, while banks take care of everything smoothly in the background.

FAQs
 

Q: What should you know about Section 194N TDS on cash withdrawals?

Section 194N requires banks to deduct TDS on large cash withdrawals once yearly limits are crossed, with rates depending on return-filing status, PAN compliance, and specific exemptions.

Q: What is Section 194N of the Income Tax Act, 1961?

Section 194N, introduced in Budget 2019, mandates TDS on large cash withdrawals beyond specified limits to discourage cash usage and promote digital transactions in India.

Q: My bank deducted 20% TDS under Section 194N even though I file ITR regularly. What should I do?

This usually happens due to PAN issues or incorrect return-filing status; check PAN linking, confirm filing history, and claim the excess TDS as a refund while filing your ITR.

Q: At what level do banks report cash withdrawals to the Income Tax Department?

Banks report high-value cash transactions to the IT Department through annual reporting systems when cash withdrawals cross prescribed limits (commonly ₹10,00,000 or more in a financial year), even if withdrawn in parts, with no fixed daily limit specified.

Q: What does Section 194N mean for large cash withdrawals?

Section 194N requires banks to deduct TDS automatically on cash withdrawals beyond prescribed limits, with rates depending on return-filing status, PAN compliance, and specific exemptions.