CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
Section 194N — Payment of Certain Amounts in Cash (Tax Deducted at Source)
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Conceptually contested; constitutional validity upheld with reading-down.
Finance Act, 2026: No amendment.
Mechanism: A bank/co-operative bank/post office deducts tax on a person's aggregate cash withdrawals exceeding ₹1 crore (or ₹20 lakh, at graded rates, for a non-filer), subject to the statutory exemptions.
Litigation profile: Constitutionally litigated. Validity upheld (Tirunelveli District Central Co-op Bank, Madras HC) as a machinery provision, with interim stays elsewhere.
A. SECTION COMMENTARY
Section 194N requires a bank, co-operative bank or post office to deduct tax at source on cash withdrawals by a person exceeding the prescribed thresholds in a financial year — broadly, two per cent on the amount exceeding ₹1 crore, with a lower threshold (₹20 lakh) and graded rates for a person who has not filed returns of income for the relevant preceding years. Introduced by the Finance Act, 2019 (and recast by the Finance Act, 2020), its avowed object is not to tax the withdrawal as income but to discourage large cash transactions and to widen the trail of high-value cash dealings.
The conceptual difficulty — deduction on a non-income receipt
Section 194N is the most conceptually contested deduction provision because a cash withdrawal is, ordinarily, not 'income' of the account-holder — it is the account-holder's own money. This has produced two lines of challenge: that Parliament lacks competence to provide for 'tax deduction' on a non-income amount (Entry 82, List I), and that the provision is arbitrary. The provision is best understood not as a charge of tax (the charge remaining in sections 4/5) but as a collection mechanism whose credit/refund mechanics reconcile it with the account-holder's actual liability; the deducted sum is creditable and refundable if no tax is ultimately due.
Exemptions and special cases
The section exempts withdrawals by the Government, banks, business correspondents, white-label ATM operators and other notified persons, and provides relief for certain co-operative societies. The treatment of withdrawals by primary agricultural credit co-operative societies and similar entities, and the position of co-operative banks, have been the subject of specific litigation. Consequences of default are the Chapter's common ones, with the distinctive feature that the 'payee' is the account-holder.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
194N.Every person, being,—
(i) a banking company to which the Banking Regulation Act, 1949 (10 of 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:
Provided that in case of a recipient who has not filed the returns of income for all of the three assessment years relevant to the three previous years, for which the time limit of file return of income under sub-section
(1) of section 139 has expired, immediately preceding the previous year in which the payment of the sum is made to him, the provision of this section shall apply with the modification that—
(i) the sum shall be the amount or the aggregate of amounts, as the case may be, in cash exceeding twenty lakh rupees during the previous year; and
(ii) the deduction shall be—
(a) an amount equal to two per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds twenty lakh rupees during the previous year but does not exceed one crore rupees; or
(b) an amount equal to five per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds one crore rupees during the previous year:
Provided further that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the first proviso shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification: Provided also that where the recipient is a co-operative society, the provisions of this section shall have effect, as if for the words "one crore rupees", the words "three crore rupees" had been substituted:
Provided also that nothing contained in this section shall apply to any payment made to—
(i) the Government;
(ii) any banking company or co-operative society engaged in carrying on the business of banking or a post office;
(iii) any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of India under the Reserve Bank of India Act, 1934 (2 of 1934);
(iv) any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 (51 of 2007):
Provided also that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the provision of this section shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification.
C. AUTHORITIES
The authorities are the constitutional-validity challenges and the reading-down of the provision. The Madras High Court decision leads, with the interim relief granted elsewhere. All citations are web-verified.
Cluster 1 — Constitutional validity and reading-down
Tirunelveli District Central Co-operative Bank Ltd. v. JCIT (TDS) (Madras High Court)
Issue: Whether section 194N is unconstitutional (beyond legislative competence; violative of Articles 14 and 19(1)(g)) as it provides for deduction on a cash withdrawal that is not 'income'.
Held: The constitutional challenge failed: the object of reducing cash transactions and promoting a transparent economy is laudable, and section 194N is a valid collection/machinery provision — it is not a charge of tax (the charge remaining in sections 4/5). The provision was, however, read so that deduction does not fasten where the sum withdrawn does not constitute income of the account-holder in an appropriate case.
Significance: The leading authority upholding the validity of section 194N while clarifying its machinery character.
Interim relief — Kerala and Calcutta High Courts
Principle: Several High Courts (including Kerala — Kanan Devan Hills Plantations — and Calcutta) granted interim stays of deduction under section 194N pending challenge, on the legislative-competence argument (Entry 82, List I — that Parliament cannot provide deduction on a non-'income' amount).
Use: Shows the live divergence and the interim protection available pending final adjudication.
Cluster 2 — Scope of exemptions (cognate)
Cash withdrawal by primary agricultural credit co-operative societies (Madras High Court)
Principle: The Madras High Court held that cash withdrawals by primary agricultural credit co-operative societies are not, as such, exempt from section 194N — the statutory exemptions are to be read strictly and do not extend by analogy.
Use: Illustrates the strict construction of the section 194N exemption list.
Hindustan Coca-Cola Beverages (P) Ltd. v. CIT (2007) 293 ITR 226 (SC) — cognate on default
Principle: No second recovery from the deductor where the payee has paid the tax; section 201(1A) interest runs for the period of default.
Use: Governs the consequence of a failure to deduct under section 194N (the account-holder being the payee).
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.
CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
Section 194N — Payment of Certain Amounts in Cash (Tax Deducted at Source)
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Conceptually contested; constitutional validity upheld with reading-down.
Finance Act, 2026: No amendment.
Mechanism: A bank/co-operative bank/post office deducts tax on a person's aggregate cash withdrawals exceeding ₹1 crore (or ₹20 lakh, at graded rates, for a non-filer), subject to the statutory exemptions.
Litigation profile: Constitutionally litigated. Validity upheld (Tirunelveli District Central Co-op Bank, Madras HC) as a machinery provision, with interim stays elsewhere.
A. SECTION COMMENTARY
Section 194N requires a bank, co-operative bank or post office to deduct tax at source on cash withdrawals by a person exceeding the prescribed thresholds in a financial year — broadly, two per cent on the amount exceeding ₹1 crore, with a lower threshold (₹20 lakh) and graded rates for a person who has not filed returns of income for the relevant preceding years. Introduced by the Finance Act, 2019 (and recast by the Finance Act, 2020), its avowed object is not to tax the withdrawal as income but to discourage large cash transactions and to widen the trail of high-value cash dealings.
The conceptual difficulty — deduction on a non-income receipt
Section 194N is the most conceptually contested deduction provision because a cash withdrawal is, ordinarily, not 'income' of the account-holder — it is the account-holder's own money. This has produced two lines of challenge: that Parliament lacks competence to provide for 'tax deduction' on a non-income amount (Entry 82, List I), and that the provision is arbitrary. The provision is best understood not as a charge of tax (the charge remaining in sections 4/5) but as a collection mechanism whose credit/refund mechanics reconcile it with the account-holder's actual liability; the deducted sum is creditable and refundable if no tax is ultimately due.
Exemptions and special cases
The section exempts withdrawals by the Government, banks, business correspondents, white-label ATM operators and other notified persons, and provides relief for certain co-operative societies. The treatment of withdrawals by primary agricultural credit co-operative societies and similar entities, and the position of co-operative banks, have been the subject of specific litigation. Consequences of default are the Chapter's common ones, with the distinctive feature that the 'payee' is the account-holder.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
194N.Every person, being,—
(i) a banking company to which the Banking Regulation Act, 1949 (10 of 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:
Provided that in case of a recipient who has not filed the returns of income for all of the three assessment years relevant to the three previous years, for which the time limit of file return of income under sub-section
(1) of section 139 has expired, immediately preceding the previous year in which the payment of the sum is made to him, the provision of this section shall apply with the modification that—
(i) the sum shall be the amount or the aggregate of amounts, as the case may be, in cash exceeding twenty lakh rupees during the previous year; and
(ii) the deduction shall be—
(a) an amount equal to two per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds twenty lakh rupees during the previous year but does not exceed one crore rupees; or
(b) an amount equal to five per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds one crore rupees during the previous year:
Provided further that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the first proviso shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification: Provided also that where the recipient is a co-operative society, the provisions of this section shall have effect, as if for the words "one crore rupees", the words "three crore rupees" had been substituted:
Provided also that nothing contained in this section shall apply to any payment made to—
(i) the Government;
(ii) any banking company or co-operative society engaged in carrying on the business of banking or a post office;
(iii) any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of India under the Reserve Bank of India Act, 1934 (2 of 1934);
(iv) any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 (51 of 2007):
Provided also that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the provision of this section shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification.
C. AUTHORITIES
The authorities are the constitutional-validity challenges and the reading-down of the provision. The Madras High Court decision leads, with the interim relief granted elsewhere. All citations are web-verified.
Cluster 1 — Constitutional validity and reading-down
Tirunelveli District Central Co-operative Bank Ltd. v. JCIT (TDS) (Madras High Court)
Issue: Whether section 194N is unconstitutional (beyond legislative competence; violative of Articles 14 and 19(1)(g)) as it provides for deduction on a cash withdrawal that is not 'income'.
Held: The constitutional challenge failed: the object of reducing cash transactions and promoting a transparent economy is laudable, and section 194N is a valid collection/machinery provision — it is not a charge of tax (the charge remaining in sections 4/5). The provision was, however, read so that deduction does not fasten where the sum withdrawn does not constitute income of the account-holder in an appropriate case.
Significance: The leading authority upholding the validity of section 194N while clarifying its machinery character.
Interim relief — Kerala and Calcutta High Courts
Principle: Several High Courts (including Kerala — Kanan Devan Hills Plantations — and Calcutta) granted interim stays of deduction under section 194N pending challenge, on the legislative-competence argument (Entry 82, List I — that Parliament cannot provide deduction on a non-'income' amount).
Use: Shows the live divergence and the interim protection available pending final adjudication.
Cluster 2 — Scope of exemptions (cognate)
Cash withdrawal by primary agricultural credit co-operative societies (Madras High Court)
Principle: The Madras High Court held that cash withdrawals by primary agricultural credit co-operative societies are not, as such, exempt from section 194N — the statutory exemptions are to be read strictly and do not extend by analogy.
Use: Illustrates the strict construction of the section 194N exemption list.
Hindustan Coca-Cola Beverages (P) Ltd. v. CIT (2007) 293 ITR 226 (SC) — cognate on default
Principle: No second recovery from the deductor where the payee has paid the tax; section 201(1A) interest runs for the period of default.
Use: Governs the consequence of a failure to deduct under section 194N (the account-holder being the payee).
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.