Tax Talk | Cash withdrawals: File ITR 2 or 3 to claim TDS

In order to discourage and monitor cash transactions, the government amended Section 194N of the Income-tax Act with effect from July 1, 2020. According to the revised provision, a bank is required to deduct TDS at 2% when cash withdrawal by a person from one or more accounts maintained by him with such a bank exceeds Rs 1 crore in the previous year.

However, if such a person has not filed their income tax return for the three previous assessment years and the time limit for filing return under Section 139(1) has expired, then TDS is required to be deducted at 2% on cash withdrawals exceeding Rs 20 lakh up to Rs 1 crore and at 5% on cash withdrawals in excess of Rs 1 crore.

Credit for TDS

Credit for TDS deducted by the bank will be available to the assessee and such TDS amount would also be reflected in their Form 26AS. However, to claim credit for the taxes deducted under Section 194N, assessees must file their income tax returns in Forms ITR 2 or 3 only. The assessee cannot claim credit of TDS under Section 194N in Form ITR 1 even though his taxable income may be below Rs 50 lakh.

It is unclear as to why the government has carved out this exception in Rule 12 of the Income-tax Rules, 1962 for claiming credit for taxes deducted Section 194N. An assessee having salary income below Rs 50 lakh, who would otherwise file his return of income in Form ITR1, is now required to file his return of income in ITR2.

What is interesting to note is that the particulars that such an assessee would report in ITR 1 are the same that they will now report in ITR 2. Hence, one cannot help but wonder about the purpose of this exclusion. One of the reasons may be that the algorithm set by the department is such that return submitted in Form ITR2/3 may be subject to additional verification during processing and enables the department to identify cases for further scrutiny.

While filing the ITR, the assessee must ensure that the correct ITR form is being submitted. While ITR 1 is the simplest among all ITR forms and the assessee may have been filing his income tax return in the said form, exceptions must be made in the years TDS under Section 194N is deducted.

The writer is partner, Nangia Andersen India. Inputs from Neetu Brahma.

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