Understanding the nuances of Tax Deducted at Source (TDS) on cash transactions is an integral part of compliance with Indian Income Tax regulations. These laws encompass cash deposits and withdrawals, identified as specified financial transactions within the tax laws of India. The Indian government introduced these measures as part of their broader strategy to oversee large transactions, stimulate digital payments, and mitigate the prevalence of unaccounted money in the economy. Here's an overview of the critical aspects of TDS related to cash transactions in India.

Cash deposits

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As stipulated by the Indian Income Tax Act, all financial institutions must declare specific transactions, including large cash deposits. An individual depositing cash in a savings account that accumulates to Rs 10 lakh or more during a fiscal year is obligated to notify tax authorities. For current account holders, the reporting limit escalates to Rs 50 lakh. It's crucial to understand that while these deposits are not taxed outright, banks must report transactions exceeding these limits to the Income Tax Department.

Cash withdrawals

TDS rules related to cash withdrawals are defined by Section 194N of the Indian Income Tax Act. The law stipulates that withdrawals above Rs 1 crore in a fiscal year attract a 2 per cent TDS. For individuals who haven't filed their income tax returns in the previous three years, a 2 per cent TDS applies to cash withdrawals over Rs 20 lakh, and a 5 per cent TDS applies to the amount withdrawn above Rs 1 crore within the same financial year.

It's worth noting that TDS deducted under Section 194N isn't classified as income but can be utilised as a credit when filing Income Tax Returns (ITR).

In a business context, deposits that align with the business turnover declared in the income tax return, specifically those under Sections 44AD/44ADA, are exempt from penalties. Conversely, deposits not linked to business operations may draw the attention of the tax department.

TDS regulations and penalties

When individuals are unable to authenticate the origin of their income, the Income Tax Department has the authority to serve notices under Section 68 of the Income Tax Act. If the income source remains unverified, a 60 per cent tax is imposed, along with a 25 per cent surcharge and a 4 per cent cess.

The Income Tax Act, under Section 269ST, also prescribes penalties for individuals who receive Rs 2 lakh or more in cash in a particular year or transaction. Nonetheless, bank withdrawals are exempt from this penalty, although TDS deductions are applicable on withdrawals surpassing the set limits.

Sections 269SS and 269T of the Income Tax Act provide regulations for cash loans. Penalties equivalent to the cash loan amount may be imposed for accepting or repaying cash loans above Rs 20,000 in a given year.