Haven't filed ITR! Know how the new TDS rules will impact you

As per the new TDS rules, the threshold limit for cash withdrawals has been reduced to Rs 20 lakh from earlier Rs 1 crore for the taxpayers who have not filed their ITRs for previous three years. If such taxpayers withdraw cash above Rs 20 lakh, they will now have to pay 2 per cent as TDS.

Hyderabad: If you have not filed the income tax returns (ITRs) for the previous three financial years and have withdrawn cash exceeding Rs 20 lakh from a bank account then you will be charged with 2 per cent of Tax Deducted at Sources (TDS) on your cash withdrawals.

As per the new TDS rules, the threshold limit for cash withdrawals has been reduced to Rs 20 lakh from earlier Rs 1 crore for the taxpayers who have not filed their ITRs for previous three years. If such taxpayers withdraw cash above Rs 20 lakh, they will now have to pay 2 per cent as TDS.

This new rule will come into effect from July 1, 2020.

What is TDS?

Tax Deducted at Sources (TDS) is a system of deduction of tax at the point of generation of income. The Union Budget 2019 introduced Section 194N for the TDS on cash withdrawals exceeding Rs 1 crore to discourage cash payments. Section 194N directs banks, co-operative banks and post offices to deduct TDS.

However, the Finance Act 2020 reduced this threshold limit for TDS to Rs 20 lakh with effect from July 1, 2020. The act has also increased the TDS rate to 5 per cent for the taxpayers who withdraws more than Rs 1 crore and has not filed ITR for three years.

What are the reasons behind changes in the cash withdrawals limit for TDS?

As per the Income Tax Department data, if we see the number of people filing income tax returns in India it is 6.72 crores for the financial year 2019-20 for a population of 130 crores. To improve tax filing and minimize revenue leakage, it was decided to introduce TDS on cash withdrawals. This will also improve the usage of electronic payment methods.

What if a person has not filed ITR for 2 years?

The Finance Act clearly says “has not filed the returns of income for all of the three assessment years” so this means that in case if the person has not filed ITR for two years then the new provisions will not be applicable.

How to calculate TDS as per the new rules?

If a person withdraws more than Rs 20 lakh and up to Rs 1 crore and has also not filed an income tax return for three years immediately preceding the year, then the TDS is 2%. If his withdrawal exceeds Rs 1 crore then 5 per cent TDS will be levied on the excess amount.

For example, if a person who has not filed income tax returns in the previous years and has withdrawn cash amounting to Rs 1.5 crore then the TDS rate of 5 per cent will be applicable as it exceeds the threshold of Rs 1 crore. The amount of TDS will be calculated on the amount withdrawn exceeding Rs 20 lakh, that is Rs 1.3 cr * 5% (1.5 cr-20 lakh).

However, taxpayers who have filed the ITRs, the threshold of Rs 1 crore and TDS rate of 2 per cent will continue to be applicable.

To get exempted from the new TDS rule a person should have been filed ITR for all the three preceding financial years for which the due date has been expired.

Also, the withdrawal limit in a financial year will be calculated on separate bank or post office accounts, not on an individual account. For example, if a person has 4 bank accounts with 4 different banks he can withdraw Rs 4 crore (1 cr* 4 bank accounts) in all the banks without any TDS.

But, if the person has 4 bank accounts in a particular bank he will be levied to TDS if his withdrawal exceeds Rs 1 crore.

Can the payee request to not to deduct tax at source?

The tax has to be recovered by banks or NBFCs or co-operative banks at the time of payment, the account holder does not have any option for requesting for non-deduction of tax under Section 194N.

(With inputs from CMA Bhogavalli Mallikarjuna. He is a Chief Taxologist at Logo Infosoft.)