Section 194N TDS on cash withdrawals: Rs 1 crore threshold, the non-filer 2%/5% trap, and PAN-Aadhaar interplay

Cash is no longer an invisible asset. Since 1 September 2019, every bank, co-operative bank, and post office in India is required by Section 194N of the Income Tax Act, 1961 to deduct tax at source the moment a customer's cumulative cash withdrawals for the financial year cross Rs 1 crore. The provision was inserted by the Finance (No. 2) Act, 2019 and amended by the Finance Act, 2020 to plug a loophole: large taxpayers routed cash through bearer cheques to avoid the audit trail of Form 26AS.

For FY 2025-26 the rule continues unchanged - 2% TDS above Rs 1 crore for compliant ITR filers, and a punitive 2%/5% slab from Rs 20 lakh onwards for non-filers. Primary agricultural credit societies have a higher Rs 3 crore threshold after the Finance Act, 2023. The deduction is fully refundable on filing the return, so the section behaves less like a tax and more like a nudge towards ITR compliance. This Morning Tax Tip walks through the statute, a numeric example using a small-business proprietor, the mistakes that show up most often in scrutiny notices, and the seven questions our TDS calculator users send us about Section 194N.

What the Section Says

Section 194N applies to a 'person responsible for paying' cash from one or more accounts maintained by a recipient. The deductor list is statutory and closed: every banking company governed by the Banking Regulation Act, 1949, every co-operative bank, and every post office (Indiacode notification dated 1 September 2019). The deductee is any person, resident or non-resident, who withdraws cash from such accounts. The aggregation is across all accounts a person holds with the same bank, including current, savings, cash credit, and overdraft accounts, but not across different banks.

The rate structure for FY 2025-26 splits cleanly between two universes. A compliant taxpayer who has filed her ITR under Section 139(1) for any one of the three preceding assessment years pays 2% TDS only on the cash component above Rs 1 crore. A non-filer - defined as a person who has not filed the return for all three preceding assessment years and for whom the due date under Section 139(1) has expired - pays 2% on cash above Rs 20 lakh and 5% once the cumulative withdrawal crosses Rs 1 crore (Income Tax Department circular on non-filer identification, ITD Notification No. 36/2020).

Section 198 of the Act prevents double counting: the TDS deducted under 194N is explicitly not deemed to be income of the depositor. That distinguishes 194N from almost every other TDS section in Chapter XVII-B, where the gross amount including TDS is taxable. The reason is mechanical - cash withdrawn from one's own account is not income; the section is engineered to enforce visibility, not to expand the tax base.

Five categories of deductee are entirely outside the section's reach by virtue of the proviso to 194N and CBDT Notifications No. 68/2019 and No. 80/2019: the Central or State Government, any banking company, any business correspondent of a banking company, white label ATM operators of any banking company, and commission agents or traders operating under the Agriculture Produce Market Committee. A separate CBDT notification dated 11 January 2024 exempts authorised dealer banks for foreign currency withdrawals under FEMA, though the rupee-cash component remains within 194N's ambit.

Worked Example

Consider Rahul Khanna, the 47-year-old proprietor of a wholesale agri-trading firm in Indore. His firm holds a current account and an overdraft account with the same private sector bank. Across FY 2025-26 he withdraws cash on the following dates to pay daily-wage labour and procurement runs:

Rahul is a regular ITR filer; his 139(1) returns for AY 2023-24, AY 2024-25, and AY 2025-26 are all on record. The bank therefore applies the 2% rate above Rs 1 crore, with no liability up to that point.

The Rs 1 crore threshold is breached on 21 November 2025 mid-transaction. Of that Rs 40,00,000 withdrawal, the first Rs 37,00,000 closes out the threshold (Rs 63,00,000 + Rs 37,00,000 = Rs 1,00,00,000) and the residual Rs 3,00,000 is liable to 2% TDS, i.e., Rs 6,000. The 14 January 2026 withdrawal of Rs 22,00,000 attracts 2% on the full amount because the threshold is already exhausted: Rs 44,000. The 9 March 2026 withdrawal of Rs 18,00,000 attracts a further Rs 36,000. Total TDS for the year: Rs 86,000, reflected in Rahul's Form 26AS under section code 194N.

If Rahul had not filed any ITR for AY 2023-24 through AY 2025-26 the arithmetic would have been brutal. The first Rs 20,00,000 would have been free; the next Rs 80,00,000 (from Rs 20,00,000 up to Rs 1,00,00,000) would have attracted 2%, i.e., Rs 1,60,000; the Rs 43,00,000 above the Rs 1 crore line would have attracted 5%, i.e., Rs 2,15,000 - a total of Rs 3,75,000. The 4.36x increment over the filer rate is the section's entire policy point. Run the math yourself on our income tax calculator to see the cash-flow drag a non-filer status creates over a typical proprietorship cycle.

Section 198 means Rahul does not add back the Rs 86,000 to business income. He claims it as a refund in ITR for AY 2026-27 via Schedule TDS2 quoting the bank's TAN and the 194N section code. If his net tax liability is below Rs 86,000 the difference is refunded by CPC Bengaluru with interest under Section 244A from 1 April 2026.

Common Mistakes

The scrutiny notices that arrive in our inbox after every July ITR rush cluster around five recurring errors, four of which are entirely avoidable.

First, taxpayers aggregate withdrawals across different banks. The Rs 1 crore threshold resets bank-by-bank. A proprietor who pulls Rs 90 lakh cash from Bank A and Rs 90 lakh from Bank B in the same FY triggers no TDS at all, even though her total cash footprint is Rs 1.8 crore. Conversely, withdrawing Rs 90 lakh each from two branches of the same bank does cross the threshold because Section 194N speaks of 'a banking company' as a single legal entity (proviso (i)). The Annual Information Statement on the income tax portal will, however, surface the cumulative figure across banks, and a Section 142(1) notice may follow even if no TDS was deducted.

Second, taxpayers forget that the filer-versus-non-filer test is dynamic. The bank refreshes the deductee's status from the CBDT's compliance check utility (CBDT Notification No. 1/2021 dated 22 June 2021) at the start of each FY and again whenever the customer crosses Rs 20 lakh. If you file your AY 2025-26 return on 31 July 2025 but the bank's last refresh was 15 July 2025, the cash withdrawal on 18 August 2025 may still be classified under the non-filer slab. Send the bank a copy of your filed ITR-V acknowledgement to force a manual re-classification under Annexure-II of the CBDT utility.

Third, taxpayers attempt to claim 194N TDS as a deduction from business income because Form 26AS displays it under their TAN-linked credit. Section 198 squarely disallows this. The credit is refundable, not deductible, and an incorrect 'TDS expense' entry will be disallowed under Section 40(a)(ia) read with the explanation inserted by Finance Act, 2014.

Fourth, taxpayers ignore the lower TDS certificate route. Section 197 does not list 194N in its scheduled sections, which is why no 197 certificate can be obtained. The taxpayer's only legitimate route to reduced deduction is to file an ITR before crossing Rs 20 lakh and supply the acknowledgement to the bank - the Section 197 lower TDS certificate playbook does not extend here. Treat 194N as a non-negotiable cash discipline, not a planning opportunity.

Fifth, the PAN-Aadhaar overlap. If your PAN is inoperative under Rule 114AAA because Aadhaar is not linked, the bank treats you as having no PAN, which triggers Section 206AA: a flat 20% TDS instead of 2% or 5%. The PAN-Aadhaar linking under Rule 114AAA explainer walks through reactivation; pay the Rs 1,000 fee and wait the 30-day window before any large cash run.

FAQ

Does Section 194N apply to cheque or NEFT withdrawals?

No. The section is restricted to cash withdrawals only. A bearer cheque encashed at the counter is treated as cash; a self-cheque deposited into another account or a NEFT transfer is outside the scope. The Finance (No. 2) Act, 2019 memorandum makes this explicit.

Are joint account holders aggregated?

The deductor aggregates withdrawals against the first-named account holder's PAN. If your spouse is the secondary holder on a joint account, withdrawals do not push against her threshold. Co-ownership of a current account is rare in practice but the same first-PAN rule applies.

Can a partnership firm and its partners aggregate their thresholds?

No. A partnership firm is a distinct 'person' under Section 2(31) of the Income Tax Act. Each partner has her own Rs 1 crore threshold. This is a frequent point of confusion at MSME compliance reviews and the position is settled by CBDT clarification dated 30 August 2019.

What if the cash is withdrawn for paying salaries to staff exempt under Rule 6DD?

The purpose of the withdrawal is irrelevant. Section 194N is mechanical - if the cash crosses the threshold, TDS applies. Rule 6DD of the Income Tax Rules, 1962 governs the deductibility of cash expenses for the payer, not the TDS on the withdrawal itself.

How quickly is the TDS refundable?

As quickly as the regular refund cycle. For ITR-3 filers with audit, the typical refund timeline is six to nine months from the date of e-verification, with interest at 0.5% per month under Section 244A. The CPC processes 194N credit directly because it carries the TAN of a banking deductor, which clears most matching errors.

Are NRO/NRE account withdrawals covered?

Yes. Section 194N applies to any account 'maintained' with the deductor irrespective of residency. The threshold and rates do not change for non-residents. NRIs running family businesses through NRO accounts should track cumulative cash drawn closely and use our old vs new regime calculator when planning the full-year tax incidence.

Does the threshold reset on 1 April each year?

Yes. The Rs 1 crore aggregation is per financial year. On 1 April 2026, the FY 2026-27 counter starts at zero. Cash withdrawn on 31 March 2026 and re-deposited on 1 April 2026 will, however, attract the AIS attention of the CBDT's risk engine even if it never crosses 194N.

Section 194N is best read as an enforcement section in the clothing of a TDS provision. The arithmetic is easy; the operational discipline is hard. Keep your ITR filing current, link PAN and Aadhaar before any large cash cycle, and use the TDS calculator to forecast the working-capital impact before the bank deducts at the counter.