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Income Tax Department Updates TDS Rules

The income tax department has updated TDS rules for making cash withdrawals from banks and post offices from this month to discourage cash transactions and improve tax enforcement. To date, you were supposed to pay a 2 per cent TDS (tax deducted at source) on cash withdrawals in excess of 1 crore per year. The TDS net has been further extended with effect from 1 July 2020.

The TDS rate is directly dependent on whether or not you have filed your income tax returns (ITR) for the last three years for high-value cash transactions totalling more than half 20 lakh in a given financial year.

Income Tax Department TDS rules for those who have filed ITR for last 3 years:

The government has introduced Section 194N in the Income Tax Act in the Union Budget 2019, under which TDS is imposed on cash withdrawals over and above the same crore. Banks, cooperative banks, and post offices fall within its sphere of competence.

“For example, if a person withdraws ₹99 lakh in the aggregate in the financial year and in the next withdrawal, an amount of ₹1,50,000 is withdrawn, the TDS liability is only on the excess amount of ₹50,000,” explains ClearTax in a note on the TDS rule.

However, for those whose PAN (Permanent Account Number) is not updated in the records of the bank. Thus, Section 206AA of the Income Tax Act deducts a much higher TDS of 20 per cent. If you have applied for PAN and have also applied for ITR. It is for the past three years, then no TDS will be paid. It is for gross cash withdrawals of less than 1 crore.

Your bank may ask you to provide proof of last three years’ ITR-V (Acknowledgement of ITR filing). Alternatively, you can also request the bank to verify the TDS rate directly. It is on the e-filing portal of the income tax department. A tool for determining the TDS rate has been enabled under Section 194N.

TDS rules for those who have not filed ITR:

If you haven’t filed ITR for three years immediately prior to this year, then the TDS deduction rate will increase.

  • For cash withdrawals up to ₹20 lakh: No TDS
  • So, For cash withdrawals of ₹20 lakh- ₹1 crore: TDS at the rate of 2%
  • For cash withdrawals exceeding ₹1 crore: TDS at the rate of 5%

Although the new TDS rule came into force from July 1. This financial year’s cash withdrawal limit will be considered as of April 1, 2020.

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