Section 194N makes the bank, the co-operative society carrying on banking, or the post office deduct 2 per cent on cash paid to you above the threshold in a year. The ordinary threshold is one crore rupees, but where the recipient is a co-operative society a proviso substitutes three crore rupees, from 1 April 2023. Where you have not filed returns for the three preceding years the thresholds and rates get worse.
Section 194N does not tax income. It attaches to an act - the payment of cash out of your account - and it makes the payer deduct. The persons who must deduct are a banking company to which the Banking Regulation Act 1949 applies, a co-operative society engaged in carrying on the business of banking, and a post office. The charge is on any sum, or aggregate of sums, in cash exceeding the threshold during the previous year, paid to any person from one or more accounts maintained by the recipient with it, and the deduction is two per cent of the sum exceeding that threshold.
The threshold is where the co-operative point lies. The base figure is one crore rupees. The Finance Act 2023 inserted a further proviso with effect from 1 April 2023 in these terms: '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.' So a society draws up to three crore rupees in a year without deduction, and 2 per cent applies only on the excess.
There is a second, harsher track for non-filers. Where the recipient has not furnished returns of income for all three assessment years preceding the previous year, the department's own material describes the position as 2 per cent on cash exceeding twenty lakh rupees but not exceeding one crore rupees, and 5 per cent on cash exceeding one crore rupees. Filing on time is therefore worth a great deal more than the compliance itself.
The exceptions are a closed list: payments to the Government, to a banking company or a co-operative society engaged in carrying on the business of banking, to a business correspondent of a banking company or co-operative bank, to a white label ATM operator, and to such other person or class of persons as the Central Government may notify in consultation with the Reserve Bank of India. The Madras High Court in Molasi Primary Agricultural Cooperative Credit Society Ltd v. ITO held that a primary agricultural credit society is not in that list, and that the requirement is non-negotiable except in line with the specific exceptions in the proviso - the fact that the cash is drawn to on-lend to farmers and is not the society's income does not help, because the section operates on the withdrawal.
Two machinery points follow. First, there is no certificate route: s.194N is not among the sections in respect of which a nil or lower deduction certificate may be obtained under s.197, so the only relief is a Government notification. This library's concept on lower or nil withholding makes the same point from the s.197 end. Second, the tax deducted is not lost. It is deemed to be income received under s.198 in the ordinary way and credit is taken under s.199 read with Rule 37BA, so a society whose income is small or exempt takes the credit and claims the refund. That is the ordinary machinery of the Act and not something the Madras High Court decided in Molasi - neither report of that decision says anything about credit or refund.
Under the Income-tax Act 2025 the provision is recast as s.393(3), effective 1 April 2026, with the same 2 per cent rate and the same two thresholds - three crore rupees for a co-operative society and one crore rupees for other persons.
Co-operative societies handle cash as a matter of ordinary business, and until 2023 they were hitting the one crore line every year and financing an interest-free loan to the exchequer until the refund came. The three crore threshold removes most of that for a small society, but not for a large one, and the point that no s.197 certificate is available means there is nothing to apply for in advance. The practical work is therefore in tracking the aggregate across all accounts with the same bank, and in getting the credit claimed correctly in the return.
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