TDS under Section 194N on Cash Withdrawal: Can Cooperative Banks Deduct TDS Separately from a Customer’s Savings Account?
Query:
A customer of a cooperative bank withdraws ₹1.20 crore in cash upon closure of a deposit. As per Section 194N of the Income-tax Act, 1961, TDS of ₹2.40 lakh is applicable. The customer requests that instead of deducting TDS from the withdrawal amount, the bank should debit the TDS separately from his savings account and allow the full ₹1.20 crore withdrawal. Is this permissible?
 
 
First Check 194N FAQ 

View TDS on Cash Withdrawal u/s 194N FAQs

1. What is TDS on cash withdrawal u/s Section 194N about?
According to section 194N of the Act, TDS has to be deducted if a sum or aggregate of sum withdrawn in cash by a person in a particular FY exceeds : 

• ₹ 20 lakh (if no ITR has been filed for all the three previous AYs), or
• ₹ 1 crore (if ITRs have been filed for all or any one of three previous AYs).

2. Who deducts TDS on cash withdrawal u/s 194N of the Act?
TDS is deducted by banks (private, public, and co-operative) or post offices. The tax is deducted when making any cash payment to any person in excess of ₹ 20 lakh or ₹ 1 crore (as the case may be) from his/her account maintained with such banks or post offices.

3. To whom is TDS on cash withdrawal u/s 194N of the Act not applicable?
TDS on cash withdrawal u/s 194N will not apply to withdrawals made by the following persons:

• Central or state government
• Private or public sector bank
• Any cooperative bank
• Post office
• Business correspondent of any bank
• White label ATM operator of any bank
• Central government specified commission agents or traders operating under Agriculture Produce Market Committee (APMC) for making payment to the farmers on account of purchase of agriculture produce
• Authorized dealers and its franchise agent and sub-agent and Full-Fledged Money Changer (FFMC) licensed by RBI and its franchise agents
• Any other person notified by the Government in consultation with RBI.

4. From when is TDS on cash withdrawal u/s 194N of the Act applicable? 
TDS on cash withdrawal u/s 194N of the Act is applicable starting 1st September 2019, or FY 2019-2020.

5. At what rate is TDS on cash withdrawal u/s 194N deducted?
TDS will be deducted at a rate of 2% on cash withdrawals in excess of ₹ 1 crore if the person withdrawing the cash has filed income tax return for any or all three previous AYs.
TDS will be deducted at 2% on cash withdrawals of more than ₹ 20 lakh and 5% for withdrawals exceeding ₹ 1 crore if the person withdrawing the cash has not filed ITR for any of the preceding three AYs. 

TDS under Section 194N: Can a Co-operative Bank Debit TDS from a Savings Account Instead of Reducing the Cash Withdrawal?
Short Answer
No. Under Section 194N of the Income-tax Act, 1961, a bank (including a co-operative bank) must deduct tax at the time of payment of cash, and the deduction must be made from the cash sum being withdrawn. Allowing a customer to withdraw the full cash amount and then separately debiting TDS from a savings account does not satisfy the statutory requirement of deduction “from any sum paid in cash.”

Correct TDS Calculation in the Example
Cash withdrawal on closure of deposit: ₹1.20 crore
The TDS depends on whether the customer has filed income tax returns (ITRs):

• If ITR filed (any of the last 3 AYs):
  TDS = 2% on the amount exceeding ₹1 crore
  → 2% of ₹20 lakh = ₹40,000
• If ITR not filed (all 3 preceding AYs):
  TDS = 2% on ₹80 lakh (₹20 lakh–₹1 crore slab) = ₹1.60 lakh
  plus 5% on ₹20 lakh (> ₹1 crore) = ₹1.00 lakh
  → Total TDS = ₹2.60 lakh

✅ The figure of ₹2.40 lakh mentioned in the query does not align with the actual provisions of Section 194N.

Why the Deduction Must Be from the Cash Paid Out
Section 194N explicitly requires deduction of TDS “from any sum paid in cash … at the time of payment.”
This imposes two strict compliance conditions:

1. Timing: Deduction must occur at the moment of cash withdrawal.
2. Source: The deduction must be made from the withdrawal amount itself.

If a bank pays out the entire cash withdrawal and later recovers TDS from another account (e.g., savings account), this is not a deduction from the cash being paid. Such a practice could expose the bank to non-compliance consequences like interest under Section 201(1A) and penalty under Section 271C.

Correct Compliance Procedure for Banks

• If ITR filed:
  Net cash payable = ₹1,20,00,000 − ₹40,000 = ₹1,19,60,000
  TDS to be deposited = ₹40,000
• If ITR not filed:
  Net cash payable = ₹1,20,00,000 − ₹2,60,000 = ₹1,17,40,000
  TDS to be deposited = ₹2,60,000

The deducted TDS will be reflected in the customer’s Form 26AS / Annual Information Statement (AIS) and can be claimed while filing the ITR.

Final Takeaway

• TDS under Section 194N must be withheld from the withdrawal amount itself.
• Banks, including co-operative banks, cannot allow full withdrawal and then debit TDS separately from another account.
• Customers should always verify the correct TDS amount, as it differs based on their ITR-filing status.

 Important Note: This article provides general guidance based on Section 194N. Readers should consult their tax practitioner or advisor for advice tailored to their specific situation.