TDS on Cash Withdrawal: Section 194N Rules, Limits, Rates & Exemptions

Understanding TDS on cash withdrawal is essential for individuals and businesses who deal with frequent or high-value bank transactions. Introduced under Section 194N of the Income Tax Act, this provision aims to reduce excessive cash use and promote digital transactions. This blog explains how these rules impact daily banking, helping users plan withdrawals effectively, stay within thresholds, and prevent unnecessary TDS deductions while maintaining smooth financial operations. [1]

What is Section 194N of the Income Tax Act?

Section 194N of the Income Tax Act explains the rules for TDS on large cash withdrawals from banks, post offices, or cooperative societies. If you withdraw over ₹1 crore in a year, the bank will deduct 2% to 5% TDS. However, if you haven’t filed income tax returns for the last three years, TDS applies even on withdrawals above ₹20 lakh. This rule encourages digital payments and helps reduce unaccounted cash use. Similarly, understanding property tax regulations is key for homeowners to stay compliant with Indian financial laws.[2][3]

Cash Withdrawal Limit and TDS Rate

Under 194N of Income Tax Act, the TDS deduction rules apply when total annual cash withdrawals cross the prescribed limits. The applicable percentage depends on the account holder category, PAN availability, and income tax filing status. [4]

Type of Account Holder	Withdrawal Limit per FY	TDS Rate
Individuals/HUFs with PAN	Up to ₹1 crore	2%
Individuals/HUFs without PAN	Up to ₹1 crore	20%
Companies/Entities	Up to ₹1 crore	2%
Non-filers of PAN	Above ₹20 lakh	5%

The withdrawal limit under Section 194N is applied cumulatively for each financial year across all accounts held by an individual or entity in one bank. This includes savings, current, and overdraft accounts. Banks track total withdrawals from all linked accounts to ensure the correct TDS rate is applied and prevent excess deductions. These standardized systems mirror the reforms under the RERA Bill, ensuring greater transparency across India’s financial and real estate sectors.

How does TDS on Cash Withdrawal Work?

Cash withdrawal TDS operates through a simple mechanism where banks deduct a small percentage of tax at the time of high-value withdrawals, ensuring compliance with Section 194N and discouraging excessive cash transactions. [5][6]

• Deduction by the bank at the time of withdrawal: Banks automatically deduct TDS when cumulative withdrawals exceed the prescribed annual limit, ensuring accurate deduction based on the account holder’s compliance status and PAN availability.
• TDS credited to the government on behalf of the account holder: The deducted amount is deposited by the bank directly into the government’s account under the account holder’s name, appearing later in their tax credit statement (Form 26AS).
• TDS can be claimed as refund while filing Income Tax Return (ITR): Account holders can claim the deducted TDS as a refund or adjust it against their total tax liability while filing annual income tax returns.
• Special cases for NRIs and corporate accounts: For NRIs and corporate entities, different limits and rates may apply based on transaction nature, tax residency, and account type, ensuring fair tax treatment under Section 194N provisions.

Filing and Refund of TDS on Cash Withdrawals

Claiming a TDS on cash withdrawal refund becomes important when banks deduct more tax than required under Section 194N. To recover this amount, taxpayers must carefully verify their TDS records, cross-check entries in Form 26AS, and file their ITR correctly. Proper reporting ensures compliance and prevents refund delays. [7]

• How TDS is reported in Form 26AS: When a bank deducts TDS on cash withdrawals, the details are automatically updated in the taxpayer’s Form 26AS under the code for Section 194N. This form reflects all tax deductions associated with the individual’s PAN. Reviewing Form 26AS ensures the deducted amount has been accurately credited and helps avoid mismatches during ITR filing.
• Claiming TDS refund in ITR if excess deducted: If the deducted TDS exceeds your total tax liability, it can be claimed as a refund while filing the Income Tax Return. The taxpayer must report the exact amount under the TDS section of the ITR form. After verification by the Income Tax Department, the approved refund is directly credited to the taxpayer’s registered bank account.
• Steps to ensure TDS credit is reflected correctly: To ensure smooth refund processing, the taxpayer should always link their PAN with all bank accounts and confirm that Form 26AS displays the correct TDS details. Additionally, filing the return before the deadline and maintaining accurate withdrawal records help verify that every deduction under Section 194N has been properly accounted for and credited. Just like property buyers must verify documents such as a possession certificate, taxpayers should also confirm their financial records for complete accuracy.

Exemptions for TDS on Cash Withdrawal

Certain exemptions apply to the tax deduction on cash withdrawal under Section 194N. 

• Withdrawals below the prescribed limit: No TDS is deducted if total annual cash withdrawals remain within ₹1 crore for regular taxpayers or ₹20 lakh for non-filers, ensuring that minor or routine transactions remain unaffected under Section 194N.
• Withdrawals for agriculture or specified purposes: Cash withdrawn for agricultural operations, crop purchases, or other notified agrarian purposes is exempt from TDS, recognizing the need for liquidity in rural and farm-based economic transactions.
• Other government-notified exemptions: Entities such as government bodies, banking companies, cooperative societies, and white-labelled ATM operators are exempt from TDS to support essential financial operations and prevent double taxation of regulated transactions.

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