The Income Tax department, in an attempt to discourage the use of cash transactions, and, to increase tax compliance, has brought changes to the TDS (Tax Deducted at Source) rules for making cash withdrawals from banks and post offices from July 2020. As of now, one was supposed to pay a TDS of 2% on cash withdrawals that exceed Rs. 1 crore in a year. Vide the new rules, with effect from 1st July 2020, the TDS net has been widened further.

Under the new rules, the TDS rate for high-value cash transactions totalling over ? 20 lakh in a given financial year will directly depend upon whether one has filed their income tax returns (ITR) for the last three years or not.

This has further been explained below-

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

The Government, in the Union Budget of 2019, had introduced a new Section 194N in the Income Tax Act, 1961, under which TDS is imposed on cash withdrawals over and above Rs. 1 crore. Banks, including co-operative banks, and post offices fall under its purview.

If a person withdraws an aggregate of Rs. 99,00,000 (99 lakh) in the financial year, and the next withdrawal, an amount of Rs. 1,50,000 (1.5 lakh) is withdrawn, the TDS liability will be only on the excess amount of Rs. 50,000.

However, for those persons whose PAN (Permanent Account Number) is not updated in the records of the bank, a much higher TDS of 20% is deducted under Section 206AA of the Income Tax Act.

If one has submitted PAN and has also filed ITR for last three years, then no TDS is charged for aggregate cash withdrawals of less than Rs. 1 crore.

A bank may ask a person to submit ITR-V, i.e., an acknowledgement of filing of ITR of the last three years, as proof. Alternatively, the person can also request the bank to verify the TDS rate directly on the Income Tax Department's e-filing portal, wherein a tool to determine the TDS rate under Section 194N has been made available.

TDS rules for those who have not filed ITR:

If one has not filed ITR for three years immediately preceding this year, i.e. since the year 2018, then the rate of TDS deduction increases.

For cash withdrawals up to an amount of Rs. 20 lakh, no TDS will be applicable.

For cash withdrawals that fall between Rs. 20 lakh to Rs. 1 crore, TDS liability will arise, at the rate of 2%.

For cash withdrawals that exceed an amount of Rs. 1 crore, TDS will be applicable at the rate of 5%.

Although the new TDS rule came into force from 1st July 2020, the cash withdrawal limit under the new rule for this financial year will be considered from 1st April 2020.