Clause 393 Tax to be deducted at source.

Income Tax Bill, 2025

Introduction

The deduction of tax at source (TDS) on cash withdrawals has emerged as a significant measure in India's fight against the proliferation of unaccounted money, cash-based transactions, and tax evasion. The statutory framework for this obligation was first introduced by Section 194N of the Income-tax Act, 1961, and has since become an integral part of the tax compliance landscape for banks, co-operative societies, post offices, and large cash-transacting entities. With the tabling of the Income Tax Bill, 2025, a new legislative architecture is proposed, encapsulated in Clause 393. This commentary undertakes a detailed analysis of Clause 393(3)[Table: S.No. 5] (TDS on cash withdrawals) and Clause 393(4)[Table: S.No. 18] (exemptions from TDS on cash withdrawals), comparing them with the existing Section 194N. The analysis will cover the legislative intent, operational mechanics, practical implications, and comparative nuances between the two regimes.

Objective and Purpose

The core objective of both Section 194N and the corresponding provisions in the Income Tax Bill, 2025 is to curb large cash withdrawals, thereby promoting a less-cash economy, increasing traceability of funds, and deterring the movement of unaccounted money. The legislative intent is to discourage cash transactions in favor of digital payments, in line with the government's broader policy objectives of financial transparency, anti-money laundering, and widening the tax base.

The rationale is that large cash withdrawals, particularly where the source or end-use is opaque, are often associated with tax evasion, money laundering, and parallel economy activities. By imposing a TDS obligation on such withdrawals, the law seeks to create a reporting trail and a financial disincentive for excessive cash usage, while also bringing such transactions under the tax authorities' surveillance.

Detailed Analysis

Clause 393(3)[Table: S.No. 5] of Income Tax Bill, 2025

Text Extract: 

"Any sum, paid in cash, from one or more accounts maintained by the deductee.

Every person, being,-
(a) a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act);
(b) a co-operative society engaged in carrying on the business of banking; or
(c) a post office.

Rate: 2%.
Threshold limit: Rs. 3,00,00,000 in case of deductee being, a co-operative society; or Rs. 1,00,00,000 in case of deductee being person other than a co-operative society."

Key Features:

• Applicability: The provision applies to cash payments made by banks, co-operative societies engaged in banking, and post offices to any person, from one or more accounts maintained by the recipient (deductee).
• Thresholds: TDS is triggered only if the aggregate cash withdrawn exceeds Rs. 1 crore in a tax year for most recipients, or Rs. 3 crore in the case of a recipient who is a co-operative society.
• Rate: The rate of TDS is 2% of the sum paid in cash above the threshold.
• Timing: The deduction is to be made at the time of payment of such sum in cash.

Interpretation and Issues:

• The provision continues the policy of targeting large cash withdrawals, with a clear carve-out for co-operative societies, which are given a higher threshold, recognizing their different operational realities and member-driven structures.
• The language "from one or more accounts maintained by the deductee" ensures aggregation across all accounts held with the same bank, co-operative society, or post office, preventing circumvention by splitting withdrawals.
• The rate is uniform (2%) and does not distinguish based on the compliance status of the recipient, unlike Section 194N (discussed below).
• The provision is silent on whether the threshold and rate apply differently if the recipient has not filed returns for previous years, as was the case u/s 194N.

Clause 393(4)[Table: S.No. 18] of Income Tax Bill, 2025

Text Extract:

"Payment of certain amounts in cash referred to in section 393(3)(Table: Sl. No. 5).

Payment made to-

(a) the Government;
(b) any banking company or co-operative society engaged in carrying on the business of banking or a post office;
(c) any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, as per the guidelines issued in this regard by the Reserve Bank of India under the Reserve Bank of India Act, 1934;
(d) any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, as per the authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007."

Key Features:

• Exempted Recipients: TDS under Clause 393(3)[Table: S.No. 5] is not to be deducted if the cash payment is made to:
  • The Government
  • Any bank, co-operative society engaged in banking, or post office
  • Business correspondents of such banks or societies, as per RBI guidelines
  • White label ATM operators, as authorized by RBI
• Policy Rationale: These exemptions are designed to ensure that TDS provisions do not disrupt the functioning of the banking system, government operations, or intermediaries facilitating last-mile banking services and ATM operations.

Interpretation and Issues:

• The list of exempted entities closely mirrors the exemptions u/s 194N, maintaining continuity in policy and operational clarity.
• The reference to RBI guidelines and authorizations ensures that only regulated entities benefit from the exemption, minimizing misuse.
• The provision does not refer to the possibility of further exemptions or reduced rates by government notification, a feature present in Section 194N.

Comparative Analysis with Section 194N of the Income-tax Act, 1961

Text Extract:

"Every person, being-
(i) a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act);
(ii) a co-operative society engaged in carrying on the business of banking; or
(iii) a post office,
who is responsible for paying any sum, being the amount or the aggregate of amounts, as the case may be, in cash exceeding one crore rupees during the previous year, to any person (herein referred to as the recipient) from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent. of such sum, as income-tax:"

Key Features:

• Applicability: Applies to cash withdrawals exceeding Rs. 1 crore in aggregate in a financial year from accounts maintained by any person with a bank, co-operative bank, or post office.
• Rate: 2% TDS on cash withdrawals above Rs. 1 crore.
• Special Rule for Non-filers: For persons who have not filed income tax returns for the previous three years, the threshold is reduced to Rs. 20 lakh, with a 2% rate between Rs. 20 lakh and Rs. 1 crore, and 5% above Rs. 1 crore.
• Higher Threshold for Co-operative Societies: For co-operative societies, the threshold is Rs. 3 crore (Finance Act, 2023 amendment).
• Exemptions: Payments to the Government, banks, co-operative banks, post offices, business correspondents, and white label ATM operators are exempt.
• Central Government Power: The Central Government may notify further exemptions or reduced rates.

Similarities

• Both frameworks seek to regulate large cash withdrawals through TDS at source.
• The threshold and rate structure is largely aligned: Rs. 1 crore for most Rs. 3 crore for co-operative societies, 2% TDS rate.
• Exemptions for Government, banks, post offices, business correspondents, and white label ATM operators are identical.
• The policy objective of discouraging cash transactions and promoting financial transparency is consistent.

Differences

• Non-filer Regime: Section 194N explicitly provides for a lower threshold (Rs. 20 lakh) and higher rate (5%) for non-filers, with a precise definition and operational guidance. The extracted Clause 393(3) does not mention this, which may represent a substantive omission or may be addressed elsewhere in the Bill.
• Legislative Structure: Clause 393 consolidates all TDS provisions under a single umbrella, using tables for various payments, while Section 194N is a standalone section. This may aid in legislative clarity and ease of reference, but could also create challenges in cross-referencing and interpretation.
• Central Government Notification Power: Section 194N empowers the Central Government to notify further exemptions or reduced rates in consultation with RBI. Clause 393(3) does not mention such power in the extracted text.
• Language and Format: The 2025 Bill uses a more tabular and itemized approach, which may improve clarity but could also lead to interpretational challenges if not cross-referenced properly.

Comparative Table

Interpretative Issues and Ambiguities

• Non-filer Provisions: Section 194N contains a specific regime for recipients who have not filed returns for the preceding three years, with a lower threshold and higher rate. The extracted text of Clause 393(3) does not mention this, but such provisions may be included elsewhere in the Bill or in subordinate legislation. The absence of explicit non-filer rules in the main clause could lead to interpretational uncertainty unless clarified.
• Aggregation Across Branches: Both the old and new provisions use aggregate withdrawals from all accounts. However, in practice, aggregation across branches and account types may require robust systems and clear guidance, especially for large banking networks.
• Definition of 'Person': The term 'person' is broad, covering individuals, companies, firms, trusts, etc. The application to different categories (e.g., partnership firms, HUFs, charitable trusts) may require clarification where their cash needs are driven by legitimate business or charitable activities.
• Overlap with Other TDS Provisions: The unified structure of Clause 393 may create overlaps or conflicts with other TDS provisions, especially where cash withdrawals are linked to other taxable transactions. The Bill provides for precedence rules in certain cases, but operational clarity is essential.
• Central Government Notification Powers: Section 194N specifically empowers the Central Government to notify further exemptions or reduced rates. The extracted clause does not mention this, which could restrict administrative flexibility unless provided elsewhere.

Practical Implications

For Banks, Co-operative Societies, and Post Offices

• Obligation to monitor all cash withdrawals by each account holder during the tax year, aggregate them, and apply TDS once the threshold is breached.
• Need for robust IT systems to track withdrawals across multiple accounts and branches.
• Requirement to comply with TDS return filing and reporting obligations.
• Potential for disputes where withdrawals are close to the threshold or where aggregation is disputed.

For Recipients (Account Holders)

• Cash withdrawals above the threshold will be subject to TDS, reducing the net amount available.
• Where TDS is deducted, the recipient may claim credit while filing their income tax return, but the cash withdrawal itself is not income-TDS is a compliance measure, not a tax on income per se.
• Non-filers (u/s 194N) face a lower threshold and higher TDS rates, incentivizing timely tax compliance.
• Co-operative societies benefit from a higher threshold, recognizing their operational needs.

For Policy and Tax Administration

• Facilitates tracking of large cash transactions and potential sources of unaccounted money.
• Acts as a deterrent for cash-intensive businesses to operate outside the formal economy.
• Creates a reporting trail for the tax authorities to investigate suspicious withdrawal patterns.

For Exempted Entities

• Government entities, banks, post offices, business correspondents, and white label ATM operators are exempt, ensuring that operational or statutory cash movements are not hindered.
• Business correspondents and white label ATM operators are recognized as critical infrastructure for financial inclusion, and thus exempted to avoid operational disruption.

Potential Issues and Areas for Clarification

• Absence of Non-filer Provisions: If the new Bill omits the stricter regime for non-filers, it may inadvertently provide a compliance loophole. Alternatively, if such provisions are present elsewhere in the Bill, cross-referencing is necessary for clarity.
• Administrative Powers: The absence of explicit notification powers may limit the government's ability to respond to operational exigencies or to provide targeted relief.
• Operational Complexity: Aggregating withdrawals across multiple accounts and branches may pose practical challenges, especially for large banks and co-operative societies.
• Litigation Risk: Disputes may arise regarding the calculation of aggregate withdrawals, especially in cases of joint accounts, partnerships, or complex organizational structures.
• Compliance Burden: The compliance and reporting burden on banks and post offices remains significant, necessitating ongoing investment in systems and staff training.

Conclusion

The TDS regime on cash withdrawals, as embodied in Section 194N of the Income-tax Act, 1961, and now in Clause 393(3)[Table: S.No. 5] and Clause 393(4)[Table: S.No. 18] of the Income Tax Bill, 2025, represents a critical measure in India's ongoing efforts to formalize the economy, enhance tax compliance, and reduce the scope for unaccounted transactions. The new Bill largely mirrors the existing framework, with minor structural and presentational changes. However, the apparent omission of explicit non-filer provisions and notification powers may necessitate further legislative or administrative clarification. As the regime continues to evolve, it will be essential for stakeholders to remain vigilant to changes, ensure robust compliance systems, and engage with the authorities to resolve ambiguities. The ultimate success of the provision will depend on effective implementation, clarity in legislative drafting, and the ability to adapt to emerging risks in the financial system

Full Text

Clause 393 Tax to be deducted at source.