Section 194NF of Income Tax Act — TDS Applicability & Rules

TDS Rate, Threshold & Conditions Under Section 194NF

Introduction and effective date (from April 1, 2021)

Section 194NF was introduced with effect from April 1, 2021, as part of amendments to the  Income Tax Act .

Overview of TDS requirement at 10% on income distributed by business trusts or investment funds to unit holders

Under this section, any income distributed to unit holders by business trusts or investment funds is subject to TDS at the rate of 10%.

Responsibility of trustee, fund manager, or authorized person for TDS deduction

The responsibility to deduct TDS lies with the trustee, fund manager, or authorized representative managing the entity.

Types of income covered under Section 194NF

• Interest income distributed to unit holders.
• Dividends distributed by the trust or fund.
• Certain capital gains distributions (except exempted categories).

Practical Examples of Section 194NF Applicability

To understand how Section 194N / 194NF works in real life, it helps to walk through some simple scenarios. These are illustrative and numbers can be updated as per current thresholds and rates.

Example 1. Regular filer with high cash withdrawals
A company regularly files its income tax returns on time. During the year, it withdraws a total of ₹1.40 crore in cash from its current account in one bank.

• Up to the basic threshold, there is no TDS.
• On the amount exceeding that threshold, the bank deducts TDS at the standard rate under Section 194N.
  The company gets credit for this TDS in its Form 26AS and can claim it in its return.

Example 2. Non filer with moderate cash withdrawals
An individual has not filed ITRs for the specified previous years but withdraws ₹30 lakh in cash during the year.

• Because the person is a non filer, a lower threshold applies.
• Once withdrawals cross that lower limit, the bank must deduct TDS on the excess amount, possibly at a higher rate.
  Even though TDS is cut, the person may still have additional tax liability or refund based on the final ITR, if filed later.

Example 3. Multiple branches of the same bank
A partnership firm withdraws cash from two branches of the same bank.

• Branch A withdrawals. ₹15 lakh
• Branch B withdrawals. ₹20 lakh
  Total = ₹35 lakh
  For Section 194N, the aggregate withdrawals with the same bank are considered. The bank or its core system must track the total and deduct TDS once the relevant threshold is crossed, even if individual branches see smaller amounts.

Example 4. Multiple banks
If the same firm withdraws ₹30 lakh from Bank X and ₹25 lakh from Bank Y, each bank looks only at its own total with that customer. If withdrawals in Bank X cross the threshold but Bank Y’s do not, then only Bank X will deduct TDS under 194N.

For CAs, these examples are useful in client discussions about branch wise vs bank wise aggregation, filer vs non filer status, and planning cash withdrawals to avoid unpleasant surprises.

Consequences of Non Compliance Under Section 194NF

Non compliance with Section 194N / 194NF mainly affects the deductor (bank, co operative bank or post office), but it can also create practical issues for the person withdrawing cash.

Key consequences.

1. Treated as ‘assessee in default’
If the bank fails to deduct TDS, or deducts at a lower rate when it should have deducted at a higher rate, the tax department can treat it as an assessee in default for the shortfall. The unpaid TDS can be recovered along with interest.

2. Interest liability
Interest is payable for.

• Non deduction of TDS from the date it was deductible till the date it is actually deducted and paid.
• Short deduction for the period of shortfall.
  This can become significant where large cash withdrawals run for months without proper deduction.

3. Penalties and prosecution exposure
Repeated or serious defaults in TDS deduction or deposit can attract:

• Monetary penalties under the TDS provisions.
• In extreme, wilful cases, even prosecution risk under the Income Tax Act.

4. Reputational and compliance risk for banks / institutions
Large scale non compliance under 194N can draw attention from regulators and tax authorities. It affects the institution’s compliance rating and can lead to stricter scrutiny of other TDS sections as well.

5. Practical problems for customers
If TDS is not deducted and reported correctly.

• The withdrawal may later be questioned in assessments or enquiries.
• The customer may not see proper TDS credit in Form 26AS, leading to mismatches in their return.
• Future refunds can get delayed due to reconciliation.

For CAs, the advisory message is simple.

• To banks. Build strong systems to track cumulative cash withdrawals and filer status and deduct TDS automatically under 194N.

To clients. Avoid unnecessary large cash withdrawals, keep your ITR filings up to date, and regularly review Form 26AS to ensure that any TDS under this section is correctly captured.

Conclusion

Section 194NF ensures that tax is deducted upfront on income distributed by business trusts and investment funds to unit holders. By placing the onus of compliance on trustees or fund managers, this provision streamlines tax collection and prevents revenue leakage. Investors should be mindful of the TDS provisions, thresholds, and exemptions to manage their post-tax income effectively.