Avoid high TDS rates by transacting online, filing ITR regularly
In order to tighten the noose on those who don’t file income tax returns (ITR) despite earning taxable income and discourage cash transactions, the Finance Act 2020 introduced higher TDS (tax deducted at source) rates on cash withdrawals for those who do not file ITR. The rule came into effect in July but the withdrawal limits for FY20 will be calculated from April.
Those who haven’t filed ITR for the past three financial years (FYs) will have to pay TDS at the rate of 2%, if the amount withdrawn from the bank is above ₹20 lakh but doesn’t exceed ₹1 crore in an FY. If the amount exceeds ₹1 crore, TDS will be deducted at the rate of 5% under Section 194N of the Income-tax Act, 1961, for those who do not file ITR.
However, even if you have filed your ITR but withdraw cash above ₹1 crore in an FY, you will still have to pay TDS but at a lower rate than those who do not file ITR. In July 2019, the government, through Section 194N, had first introduced TDS at the rate of 2% on cash withdrawals above ₹1 crore in a financial year. This continues to be applicable.
“It is important to note that TDS shall be required to be deducted only when the aggregate amount of cash withdrawal during the FY by an individual from one or more of his bank accounts exceeds ₹20 lakh or ₹1 crore, as the case may be,” said Parizad Sirwalla, partner and head, global mobility services, tax, KPMG in India.
Further, tax will be deducted only on the amount exceeding the said thresholds. “If the individual withdraws a sum of money on regular intervals, the bank or financial institution will have to deduct TDS from the amount once the total sum withdrawn exceeds the threshold in an FY,” said Sirwalla.
For example, if person A has filed his ITR and if he withdraws cash up to ₹1 crore, then no TDS will be applicable. In case person A withdraws cash which is more than ₹1 crore, then only 2% TDS will be applicable. If person A has withdrawn ₹1.25 crore in two transaction of ₹75 lakh in and ₹50 lakh, the TDS liability will only be on the excess amount that is ₹25 lakh.
On the other hand, if person B has not filed his ITR for the last three FYs and if he withdraws cash between ₹20 lakh and ₹1 crore, then 2% TDS will be applicable. In case person B withdraws cash which is more than ₹1 crore, then 5% TDS will be applicable.
“In case the individual does not furnish the PAN to the bank or financial institution, then TDS at a higher rate of 20% will become applicable,” said Sirwalla.
TDS will be applicable on withdrawals from banks, co-operative banks and post offices. The limit will apply on all accounts in the same bank. So, if you have multiple accounts with the same bank, then TDS will be applicable once you breach the mandatory limit across all the accounts with the same bank. But for accounts with different banks, the limit will apply separately.
Banks will need to keep track of cash withdrawals and once the limit is breached, they will need to deduct TDS.
“Banks are asking declaration from people to ensure they have filed ITR in the past three years or in any one of the last three years, for easier tracking,” said Sandeep Sehgal, director, taxes and regulatory, AKM Global.
The purpose of levying high TDS is to minimize cash transactions and push digital payments. “The levy is applicable only for large cash withdrawals. The intent is to minimize cash transactions and expand digital payments to enlarge the ambit of organized transactions over time,” said Divakar Vijayasarathy, founder and managing partner, DVS Advisors LLP.
To avoid paying high TDS, ensure that the bulk of your payments happen through the banking or digital channels.
FundsTiger can arrange loans from almost all the banks. You can apply for an attractive offer with best possible rate of interest and terms for Personal Loan, Business Loan , Home Loan and Car Refinance Loan.