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Section 194N of Income Tax Act

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July 19, 2022

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8 mins read

Section 194N of Income Tax Act

S. No Content
1 What is section 194N ?
2 Parties Involved under section 194N ?
3 Rate of TDS under Section 194N ?
4 Threshold limit under Section 194N ?
5 Timing for deduction under 194N ?
6 Exemption from TDS under section 194N ?

What is Section 194N ?

Section 194N specifies that every person, being a

  1. Banking company;
  2. Co-operative society engaged in the business of banking; or
  3. Post office

is required to deduct tax ,  from any sum payable in cash during the previous year , where such payment exceeds the threshold limit, to any person from one or more accounts held by such person or recipient.

Parties responsible to deduct TDS under section 194N

As per section 194N, the following parties are required to deduct TDS at the time of payment:

  1. Banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act);
  2. Co-operative society engaged in carrying on the business of banking; or
  3. Post office.

Rate of TDS under section 194N of Income Tax Act

TDS is required to be deducted at the basic rate of 2 percent of sum payable in cash exceeding Rs. 1 crore during the previous year from one or more accounts held by the recipient.

However, the rate of TDS u/s 194N can vary, depending on whether the recipient has defaulted in filing of tax returns   for 3 consecutive assessment years, immediately preceding the previous year in which the payment is made to the recipient.

1. If there is no default in filing a return

Tax must be deducted at 2 percent of sum payable in cash , exceeding Rs. 1 crore during the previous year.

2. If there is a default in filing a return

Where the recipient has defaulted in filing of returns for 3 consecutive assessment years, immediately preceding the previous year in which cash is withdrawn, the tax will be deducted at the rate of:

  • 2% of the amount payable in cash exceeding Rs. 20 Lakhs but less than or equal to Rs. 1 crore;
  • 5% of the amount payable in cash exceeding Rs. 1 crore during the previous year.

Surcharge or Health and Education Cess will not be added to these rates

If the deductee doesn’t provide his PAN to the deductor, the tax will be deducted under Section 206AA at 20%.

Threshold limit under 194N of Income tax Act

Section 194N provides for deduction of tax deduct tax at a specified rate  by specified person, for cash payment exceeding the threshold discussed above.

Timing for deduction under 194N

As per section 194N, tax is required to be deducted at the time of payment.

Exemption from TDS under section 194N of Income tax Act

TDS is not required to be deducted u/s 194N, if sum or aggregate of sums paid in cash during the previous year does not exceeds Rs. 1 crore or Rs. 20 Lakhs, as the case may be, from one or more accounts.

TDS Sections

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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