Why TDS Is Charged on Cash Withdrawals by Banks – Key Rules Explained
The purpose of introducing Section 194N is to curb heavy cash usage and support the shift toward a digital and transparent economy. According to this section, TDS is deducted on cash withdrawals from banks, co-operative banks, or post offices once the total amount goes beyond the set yearly limit. It covers a wide range of taxpayers—individuals, HUFs, businesses, companies, and trusts—so knowing how it works is crucial for compliance.
Where Section 194N Applies
Section 194N is triggered when cash is taken out from a scheduled bank, a co-operative bank, or a post office. TDS is deducted once the total cash withdrawn during the financial year exceeds the allowed limit.
Cash can be withdrawn through:
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Self cheques
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Bearer cheques
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ATM withdrawals
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Cash taken directly from the bank counter
Online transfers and digital payments are excluded from TDS.
TDS Rates and Limits
The applicable TDS rate depends on whether the taxpayer has filed income tax returns for the past three assessment years.
A. When the individual has filed Income Tax Returns for any of the previous three years
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No TDS is applied until total cash withdrawals reach ₹1 crore in a financial year.
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Once this limit is crossed, TDS is charged at 2% on the amount exceeding ₹1 crore.
Example:
If the total cash withdrawn is ₹1.30 crore, TDS @ 2% will apply on ₹30 lakh.
B. When the individual has not filed ITRs for all of the last three years
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A 2% TDS rate applies on withdrawals above ₹20 lakh up to ₹1 crore.
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A 5% TDS rate applies on any withdrawal amount beyond ₹1 crore.
Example:
Total withdrawal = ₹1.50 crore
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2% on ₹80 lakh (from ₹20 lakh up to ₹1 crore)
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5% on ₹50 lakh (amount beyond ₹1 crore)
Entities Exempt From Section 194N
TDS is not deducted on cash withdrawals made by:
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Central and State Government bodies
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Banks, co-operative banks, and post offices
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Business correspondents operating for banks
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White label ATM operators
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Any person or class of persons specifically notified by the government
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Certain commission agents/traders who withdraw cash on behalf of farmers
These exemptions are designed to keep essential services and banking operations running smoothly.
How Section 194N Works in Practice
How banks calculate TDS
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Banks total all cash withdrawals across every account held by the user.
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TDS is triggered immediately once the withdrawal crosses the applicable threshold.
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PAN data is used to determine whether the person is an ITR filer or a non-filer.
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Banks may request confirmation of ITR filing status to apply the correct rates.
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The deducted TDS is reflected in Form 26AS or AIS and can be claimed in the income tax return.
Key Examples
Example 1: ITR Filer
Mr. A (who has filed ITRs) makes the following withdrawals:
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₹40 lakh
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₹35 lakh
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₹30 lakh
Total = ₹1.05 crore
TDS = 2% on ₹5 lakh = ₹10,000
Example 2: ITR Non-Filer
Ms. B (no ITR filed for 3 years) withdraws ₹55 lakh.
TDS = 2% on (₹55 lakh – ₹20 lakh) = ₹7,00,000
If she withdraws ₹1.40 crore:
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2% on ₹80 lakh
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5% on ₹40 lakh
Important Compliance Tips for Professionals
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Make sure clients have filed their ITRs to avoid higher TDS rates.
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Advise cash-heavy businesses to plan their yearly cash withdrawals carefully.
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Track withdrawals from every account held in the same bank.
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Review Section 194N entries in Form 26AS/AIS regularly.
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Maintain proper records for audit purposes, especially for large cash withdrawals.
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Remind clients that TDS is not an additional tax—it can be adjusted or refunded in the ITR.
Frequent Errors to Watch Out For
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Thinking each account has a separate ₹1 crore limit—limits apply per bank, not per account.
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Assuming TDS is charged only at the end of the year—it applies as soon as the limit is crossed.
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Misunderstanding the difference between filer and non-filer status.
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Failing to monitor withdrawals from all branches of the same bank.
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Believing TDS is a permanent loss—it is actually claimable