Introduction
TDS on cash withdrawal has created fresh confusion due to the language used in the new Income Tax Act, 2025. The issue is mainly around how tax should be deducted when cash withdrawal crosses the threshold limit.
The discussion specifically takes the example of Section 194N of the Income Tax Act, 1961 and compares it with the corresponding language under Section 393 of the Income Tax Act, 2025. The main question is simple: if cash withdrawal is ₹1.10 crore and the threshold is ₹1 crore, should TDS apply only on ₹10 lakh or on the entire ₹1.10 crore?
Main Discussion
Under the existing provision discussed, Section 194N deals with TDS on cash withdrawal. The provision applies where a banking company, co-operative bank or post office is responsible for paying cash to a person from one or more accounts maintained with it.
As explained in the discussion, under Section 194N, if a person withdraws cash exceeding ₹1 crore during the previous year, TDS is understood to apply on the amount exceeding ₹1 crore.
For example, if a businessman withdraws ₹1.10 crore in cash, then under the old understanding of Section 194N, TDS would apply only on ₹10 lakh, being the amount exceeding the threshold limit of ₹1 crore.
The confusion has arisen because of the language used in the new Income Tax Act, 2025. The discussion refers to Section 393, sub-section (3), where different types of income and sums are placed in a table.
One of the entries in that table refers to any sum paid in cash from one or more accounts maintained by any person. The payer in this case is a banking company. The threshold limit discussed is ₹1 crore for persons other than co-operative society, and a higher threshold is discussed for co-operative society.
The main point of debate is the wording that the person responsible for making payment shall deduct income tax “on the entire amount of such sum” where the amount or aggregate amount exceeds the threshold limit.
Because of this language, one interpretation is that once the cash withdrawal crosses ₹1 crore, TDS may apply on the full withdrawal amount. So, in the example of ₹1.10 crore, TDS may be deducted on the entire ₹1.10 crore.
However, the second interpretation is that “entire amount of such sum” should still mean only the amount exceeding the threshold limit. Under this interpretation, in the example of ₹1.10 crore, TDS should apply only on ₹10 lakh.
The expert’s view in the discussion is that applying TDS on the full ₹1.10 crore does not appear to be the correct interpretation. If this view is accepted, then the purpose of having a threshold limit itself becomes weak. Threshold provisions exist to tax or deduct only after a certain limit is crossed. If the entire amount becomes subject to TDS after crossing the threshold, it may create unnecessary hardship and confusion.
Therefore, the discussion highlights that clarification is required on this issue.
Practical Impact
This issue is important for banks, co-operative banks, post offices, businesses and taxpayers who make large cash withdrawals.
If the old interpretation is followed, TDS would be deducted only on the amount exceeding the threshold limit. For example, on withdrawal of ₹1.10 crore, TDS would apply only on ₹10 lakh.
But if the new interpretation is followed strictly based on the phrase “on the entire amount of such sum,” TDS may be deducted on the full ₹1.10 crore. This can create a major cash flow impact for taxpayers.
It may also create differences in practice. Some banks may deduct TDS only on the excess amount, while others may take a conservative view and deduct TDS on the full amount after the threshold is crossed.
The same issue may also affect other TDS provisions where threshold limits are provided. If the language is read broadly, it can create confusion across different TDS provisions.
Therefore, until a proper clarification is issued, professionals and taxpayers should be careful while interpreting the provision. They should document their view and follow a consistent and reasonable approach.
Conclusion
The discussion shows that the simplification of language under the new Income Tax Act, 2025 may create new interpretation issues. In the case of TDS on cash withdrawal, the key confusion is whether TDS should apply only on the amount exceeding the threshold or on the entire withdrawal amount once the threshold is crossed.
The practical and reasonable view discussed is that TDS should apply only on the amount exceeding the threshold limit. However, because the new language uses the phrase “on the entire amount of such sum,” a formal clarification would be useful.
key takeaways
- Section 194N deals with TDS on cash withdrawal.
- Under the old understanding, TDS applies only on the amount exceeding the threshold.
- Example: if cash withdrawal is ₹1.10 crore and threshold is ₹1 crore, TDS applies on ₹10 lakh.
- Section 393 of the Income Tax Act, 2025 uses language that has created confusion.
- One view is that TDS may apply on the entire withdrawal amount after crossing the threshold.
- Another view is that TDS should apply only on the excess amount.
- The expert view is that TDS on the entire amount does not appear to be the correct interpretation.
- Clarification is required to avoid unnecessary disputes and inconsistent practice.
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