Section 194N: 2% TDS Bites When Your Cash Withdrawals Cross Rs 1 Crore in a Year

Most Indians think of Tax Deducted at Source (TDS) as something that touches their salary, their fixed-deposit interest, or a contractor's bill. Section 194N of the Income Tax Act 1961 broke that mould. Since 1 September 2019, the very act of pulling large amounts of physical cash out of your own bank account can trigger a 2% deduction, even though a withdrawal is not "income" in any normal sense. The Income Tax Department introduced it as a nudge against the cash economy, and it now quietly bites thousands of account holders every financial year.

The rule is deceptively simple on paper and easy to trip over in practice. If your aggregate cash withdrawals from a single bank cross Rs 1 crore in one financial year, the bank must deduct 2% on the excess. For people who have not filed an income tax return in recent years, the trigger drops all the way to Rs 20 lakh. This piece walks through exactly what Section 194N says, a fully worked numerical example, the mistakes that surface in scrutiny, and the questions readers ask most often.

What the Section Says

Section 194N was inserted by the Finance (No. 2) Act 2019 and came into force on 1 September 2019. It casts the deduction duty on the "payer" of cash: every bank (public, private and co-operative) and every post office. When such a payer makes cash payments to a person from the accounts that person maintains with it, and the aggregate of those cash payments in a financial year crosses the statutory limit, the payer deducts TDS on the sum exceeding the limit.

The rate and threshold depend on one thing: whether you are a filer or a non-filer of income tax returns. A "filer" is a person who has furnished an income tax return for any or all of the three assessment years immediately preceding the year of withdrawal, for which the due date under Section 139(1) has expired. A "non-filer" is someone who has filed no return in all three of those preceding assessment years. The table below sets out the structure exactly as the Income Tax Department states it.

Two structural points matter. First, the Rs 1 crore (or Rs 20 lakh) ceiling is computed separately for each bank or post office, not across your entire banking relationship: three accounts in three different banks each get their own Rs 1 crore headroom. Second, the deduction under Section 194N is not a final tax and it is not an income tax deduction against income; it is simply tax collected in advance. It shows up in your Form 26AS and can be adjusted against your total tax liability when you file, with any excess refunded. You can model that year-end liability using the Oquilia Income Tax Calculator and check the withholding mechanics on the TDS calculator.

The section also lists exempt payees on whom no TDS applies, notified by the Central Government in consultation with the Reserve Bank of India. These include the Government, any banking company or co-operative bank, business correspondents of a bank, white-label ATM operators, authorised dealers and their franchise agents dealing in foreign currency, and traders or commission agents registered under an Agriculture Produce Market Committee (APMC) for cash payments to farmers. If you fall in one of these categories, the Rs 1 crore trigger simply does not apply to you.

Worked Example

Consider Rajesh, who runs a wholesale textile business and files his ITR every year. During FY 2025-26 he withdraws cash frequently from his current account with Bank A to pay daily-wage labour and small suppliers. By 31 March 2026 his aggregate cash withdrawals from Bank A total Rs 1.75 crore. Because Rajesh is a filer, only the first Rs 1 crore is free of TDS.

The excess over the threshold is Rs 1.75 crore minus Rs 1 crore, which equals Rs 75 lakh. The bank deducts 2% on that excess: Rs 75,00,000 multiplied by 2% works out to Rs 1,50,000. Bank A withholds this Rs 1.5 lakh, deposits it against Rajesh's PAN, and reports it, so it appears in his Form 26AS as TDS under Section 194N. Rajesh is not losing this money; it becomes a credit he claims when filing his return, exactly like advance tax.

Now change one fact. Suppose Rajesh had failed to file any ITR for the three preceding assessment years. The table below shows how his same Rs 1.75 crore withdrawal is taxed far more harshly as a non-filer.

As a non-filer Rajesh suffers Rs 5,35,000 of TDS against Rs 1,50,000 as a filer, a difference of Rs 3,85,000 on the identical Rs 1.75 crore of cash. This gap is the whole point of the design: Section 194N is calibrated to make chronic non-filing expensive at the cash counter. Filing even one of the last three returns before the Section 139(1) due date moves you into the far cheaper filer column. Because the credit for this TDS reduces your final bill, it is worth reconciling it against your computed liability; the old-vs-new regime calculator helps you fix the liability figure first.

Common Mistakes

The first and most common error is assuming the Rs 1 crore limit is a single figure spread across all your banks. It is not. Under the language of Section 194N, each bank or post office tracks its own aggregate, so someone splitting Rs 1.5 crore of withdrawals as Rs 80 lakh from Bank A and Rs 70 lakh from Bank B in FY 2025-26 stays below the trigger at both, and no 194N TDS arises. Assessing officers do, however, view deliberate structuring of withdrawals to dodge the limit as a red flag worth probing.

A second mistake is treating the 194N deduction as a lost or exempt amount. Some account holders write it off entirely, or worse, try to claim it as a business expense. It is neither. The sum is pure tax credit reflected in Form 26AS and your Annual Information Statement, and it must be claimed in the return exactly as advance tax or salary TDS is claimed. Omitting it means overpaying; claiming it against the wrong head invites a mismatch notice.

Third, non-filers routinely underestimate the Rs 20 lakh trigger. A trader who genuinely believed the Rs 1 crore figure applied to everyone can find 2% deducted after just Rs 20 lakh of cash simply because no return was filed for the three preceding assessment years. The remedy is straightforward but time-bound: file the pending return before the Section 139(1) due date lapses so that the year counts, and you shift into the filer bracket for subsequent withdrawals.

A fourth error is forgetting that 194N interacts with your PAN, not your name. If the bank does not have a valid, linked PAN, higher deduction under Section 206AA can apply, and the credit may not flow to your Form 26AS cleanly. Verify that your PAN is seeded and Aadhaar-linked before making large cash withdrawals in a financial year.

FAQ

Is Section 194N TDS refundable?

Yes. TDS under Section 194N is not a final tax. It is collected in advance, appears in your Form 26AS, and is adjusted against your total tax liability when you file your return. If your final liability is lower than the tax already deducted and paid, the excess is refunded after your return is processed, just like any other TDS or advance tax credit.

Does the Rs 1 crore limit apply per account or per bank?

The aggregate is computed by each payer, meaning per bank or per post office (across the accounts you hold with that same payer). Different banks each maintain their own Rs 1 crore threshold. So the limit is effectively per bank rather than a single nationwide figure across all your relationships.

Who deducts the TDS under Section 194N?

The payer of the cash deducts it: banking companies (public and private), co-operative banks, and post offices. They deduct at the point of paying you cash once your aggregate withdrawals from them cross the applicable threshold in that financial year, and they deposit it against your PAN.

What is the threshold for someone who has never filed an ITR?

For a person who has not filed an income tax return in all three of the immediately preceding assessment years (where the Section 139(1) due date has expired), TDS is 2% on cash withdrawals exceeding Rs 20 lakh and 5% on withdrawals exceeding Rs 1 crore in the financial year, per bank or post office.

When did Section 194N come into effect?

Section 194N applies from 1 September 2019, that is, from FY 2019-20. It was inserted by the Finance (No. 2) Act 2019. The current two-tier structure for non-filers took shape through subsequent amendments and remains in force for FY 2025-26.

Are any withdrawals exempt from Section 194N?

Yes. No TDS applies to cash paid to the Government, banking companies or co-operative banks, business correspondents of a bank, white-label ATM operators, authorised foreign-exchange dealers and their agents, and APMC-registered traders or commission agents making payments to farmers, along with others notified by the Central Government in consultation with the RBI.

Can I avoid 194N by using multiple banks?

Because the threshold is measured per bank, spreading genuine withdrawals across banks can keep each below Rs 1 crore. However, deliberately structuring transactions solely to defeat the section can draw scrutiny. The cleaner route for most people is to reduce cash dependence and, if you are a non-filer, to file your return so the Rs 1 crore filer threshold applies instead of the Rs 20 lakh non-filer one.