To discourage cash transactions and to move towards the cash-less economy, the Finance (No. 2) Act, 2019 inserted a new Section 194N to the Income-tax Act, 1961. Section 194N provides that a banking company or a co-op. bank or a post office is required to deduct tax at source at the rate of 2% from the amount withdrawn in cash from any account (saving or current account) if the aggregate of the amount of withdrawn from one or more account exceeds Rs. 1 crore during the year.

The Finance Act, 2020, has further expanded the scope of this section to provide different tax rates for two different class of persons and two threshold limits. A new proviso has been inserted to Section 194N, which changes the threshold limit for deduction of tax from Rs. 1 crore to Rs. 20 lakh if the person, has not filed return of income (ITR) for three assessment years relevant to previous years immediately preceding the previous year in which cash is withdrawn, and the due date for filing ITR under section 139(1) has expired. The deduction of tax under this situation shall be at the rate of:

(a) 2% of the amount withdrawn in cash, if the aggregate of the amount withdrawnduring the previous year exceeds Rs. 20 lakhs but does not exceed Rs. 1 crore; or

(b) 5% from the amount withdrawn in cash, if the aggregate of the amount withdrawn during the previous year exceeds Rs. 1 crore.

In the above situation, the tax shall be deducted on the amount exceeding Rs. 20 lakhs or Rs. 1 crore, as the case may be.

It was apprehended that verifying the status of Income-tax returns of account-holder would bea complex task for the banks. Banks will be required to ask the account holders to submit the proof of filing of return for preceding 3 financial years. Thus, to simplify the process, the CBDT has introduced a functionality on the e-filing platform to enable the banking company or a co-op. bank or a post office to check whether person withdrawing cash is falling within the proviso or not. 

This new functionality for determining applicable TDS rate under section 194N can be used without log-in on the e-filing portal. 

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