Cash Withdrawal TDS at 2% Above ₹1 Crore — How Current Account Holders Are Restructuring Transactions to Stay Tax-Smart in FY 2026–27

Every April, Indian business owners and finance teams recalibrate their cash management strategies. In FY 2026–27, one provision sitting quietly in the Income Tax Act demands sharper attention than most: the 2% TDS on cash withdrawals exceeding ₹1 crore under what was previously Section 194N and is now codified under the Income Tax Act, 2025 (applicable from April 1, 2026). This is not a penalty. It is not a fine. It is a tax deducted at source — but for businesses that operate on thin margins or need working capital fluidity, even a temporary blockage of 2% on multi-crore withdrawals can create measurable cash flow friction. Understanding exactly how this rule works, who it touches, and how forward-thinking current account holders are restructuring their transaction behaviour is the subject of this deep dive.

The Legal Foundation: What the Law Actually Says

The provision targeting large cash withdrawals was introduced during Union Budget 2019 and has remained structurally intact through subsequent amendments and now into the new Income Tax Act, 2025. The operative rule for FY 2026–27 is as follows: any person withdrawing cash exceeding ₹1 crore in aggregate from one or more accounts maintained with a bank, co-operative society, or post office during a financial year will have 2% TDS deducted on the amount exceeding that threshold — provided they have a clean ITR filing history for the three preceding assessment years.

The rule bifurcates sharply for non-filers. If you have not filed income tax returns for the three immediately preceding years, your threshold collapses dramatically to ₹20 lakh. Between ₹20 lakh and ₹1 crore, TDS applies at 2%, and for any withdrawal above ₹1 crore, the deduction rate jumps to 5%. This asymmetry is deliberate — it creates a strong fiscal incentive to maintain consistent return-filing discipline, not just for compliance optics but for hard rupee savings at the point of every large cash transaction.

For co-operative societies, there is a relaxation: the threshold is extended to ₹3 crore before the 2% rate triggers. This acknowledges the unique operational nature of agricultural and rural co-operatives that handle large volumes of physical cash by necessity, particularly at harvest time and during commodity procurement cycles.

The April 2026 Reset: What Changed Under the New Tax Act

Starting April 1, 2026, the Income Tax Act, 2025 replaced the 1961 Act as the governing statute for direct taxation in India. The TDS provisions on cash withdrawals have been re-numbered and restructured but the economic substance remains consistent with the older Section 194N. The 2% rate on withdrawals above ₹1 crore for compliant filers is preserved.

What has changed meaningfully in the compliance ecosystem is the PAN reporting framework. Under the Draft Income Tax Rules, 2026, the focus has shifted from single-day thresholds to annual financial footprints. PAN is now mandatory once total cash withdrawals across all accounts in a financial year exceed ₹10 lakh — a significant shift from the previous norm that was triggered by single-day cash transactions of ₹50,000. Banks are now required to monitor and report on an annual aggregate basis rather than per-transaction, which fundamentally changes how high-volume cash withdrawers are being tracked within the banking system.

Additionally, any inoperative PAN — typically due to non-linking with Aadhaar — can trigger TDS deductions at rates as high as 20% on applicable transactions. For a current account holder withdrawing ₹1.5 crore in a year, an inoperative PAN could transform a routine banking operation into an extraordinarily expensive compliance lapse.

Who Is Most Exposed: Profiling the Affected Business Segments

Not every business is equally affected by this provision. The most exposed segments are those where cash-based operations remain structurally entrenched despite the digital push. Consider the following categories where current account holders routinely approach or exceed the ₹1 crore cash withdrawal mark each year:

• Wholesale traders in commodities, FMCG, and agriculture who pay field agents, daily wage workers, and commission agents in cash
• Real estate developers who manage site operations — labour payments, material procurement in Tier 2 and Tier 3 cities — in cash-dominated supply chains
• Event management companies, construction contractors, and logistics firms that pay subcontractors and ground-level workforce in cash
• Jewellery businesses, especially those in cities like Surat, Jaipur, and Lucknow, where artisan payments and raw material procurement happen in physical currency
• Retailers managing multi-outlet operations with centralised cash management

For all of these, the ₹1 crore threshold is not a distant horizon — it is crossed within the first quarter of the financial year. The question they are now asking their CAs and tax consultants is not whether TDS will apply, but how to manage its impact with minimal cash flow disruption.

How Current Account Holders Are Restructuring Transactions

Smart business owners are not trying to evade the law — they are engineering their financial workflows to stay within its most favourable provisions. Here is what the restructuring looks like in practice across India’s business community right now.

Spreading Withdrawals Across Multiple Bank Relationships

The TDS threshold under this provision is calculated per bank, not as an aggregate across all banks. A business that maintains current accounts across three banks — say, HDFC, SBI, and a private cooperative bank — can structure its cash requirements such that no single bank account breaches the ₹1 crore withdrawal mark in a year. This is a legitimate and widely adopted approach. A business with ₹2.5 crore in total annual cash requirement, for instance, could distribute withdrawals across three accounts at approximately ₹80–85 lakh each, keeping every account below the threshold.

This strategy requires careful treasury management and a clear accounting of which account is being used for which operational purpose. Many mid-size businesses are now investing in basic treasury management software or working with their bankers to set monthly withdrawal alerts that flag when a single account approaches 80–85% of the annual ₹1 crore limit.

Accelerating the Migration to Digital Payments for Vendor and Labour Payments

India’s UPI infrastructure processed over 117 billion transactions in 2023, and the volume has only grown since. For businesses that were previously paying daily-wage workers, vendors, or commission agents in cash, the UPI-based direct transfer model has become an increasingly viable alternative. Several state governments and larger contractors have begun onboarding even informal-sector workers onto basic Jan Dhan or zero-balance accounts, enabling IMPS or UPI-based salary credits.

The operational benefit is twofold: it reduces the total cash withdrawal volume (keeping the business below the ₹1 crore trigger), and it creates a documented payment trail that strengthens the business’s ITR filing position and reduces the risk of scrutiny on unexplained cash outflows. According to a 2025 RBI report, the share of digital in total Indian transactions has risen to 54%, though the absolute value of cash transactions has continued to grow — indicating that digital adoption complements rather than replaces cash for most businesses.

Maintaining Impeccable ITR Filing Records

This is the single most impactful step a current account holder can take. The difference between a 2% TDS rate and a 5% rate — or between a ₹1 crore threshold and a ₹20 lakh threshold — is entirely determined by whether the taxpayer has filed ITRs for the three preceding assessment years. For a business withdrawing ₹1.2 crore in cash during FY 2026–27, the difference between being a compliant filer (2% on ₹20 lakh = ₹40,000 TDS) and a non-filer (5% on ₹20 lakh = ₹1 lakh TDS) is meaningful. Scale that across several crores in withdrawal, and the numbers become significant.

Many business owners who previously treated ITR filing as an annual afterthought are now treating it as an active cash management decision. The CA community in cities like Mumbai, Delhi, and Lucknow reports a noticeable uptick in businesses approaching them specifically to regularise their ITR filing status before April 1 of each year, precisely to protect their favourable TDS treatment at the bank.

Applying for Lower or Nil TDS Certificates

Certain businesses that have a legitimate and documented reason for large cash withdrawals — for example, entities that are exempt under the provision or those with consistently high cash refund positions — can apply to the assessing officer for a lower or nil TDS certificate. Starting from April 1, 2026, this process has been significantly streamlined: lower or nil TDS certificates will now be issued through a rule-based automated system based on objective parameters, replacing the earlier manual approval process. This is a material improvement for businesses that previously found the certificate process opaque and time-consuming.

Restructuring Payment Cycles and Cash Float Management

Another approach gaining traction is the restructuring of operational payment cycles. Businesses that previously made large lump-sum cash withdrawals once or twice a month are shifting to more frequent, smaller withdrawals — not to game the system, but to better align cash availability with operational need and reduce idle cash exposure. When coupled with a multi-bank strategy, this creates a more granular and defensible cash management posture.

It is important to note, however, that TDS under this provision applies to cumulative withdrawals across the financial year from a single bank account — not individual transaction amounts. So a business withdrawing ₹10 lakh per month from the same current account will cross the ₹1 crore mark by month ten and face 2% TDS on any subsequent withdrawal in that year from the same account. Awareness of this cumulative calculation is essential for accurate treasury planning.

The Refund Mechanism: TDS Is Not a Final Tax

One of the most important and frequently misunderstood aspects of this provision is that TDS deducted under it is not a permanent cost — it is a credit against the taxpayer’s total income tax liability for the year. If a business’s actual income tax liability (calculated on its net profits after all deductions and expenses) is lower than the TDS deducted, the excess amount is refundable through the ITR process.

This means that for a profitable business in a high tax bracket, the 2% TDS on cash withdrawals above ₹1 crore may ultimately cost nothing at all — it is simply a prepayment of tax. The real cost is the time value of money during the period between when the TDS is deducted (throughout the year) and when the refund is received (typically 3–6 months after ITR filing). For businesses with tight working capital, even this temporary cash blockage can have real operational consequences, making proactive TDS management a genuine financial discipline rather than a theoretical concern.

Compliance Pitfalls That Can Turn Costly in FY 2026–27

The evolving reporting environment under the new 2026 tax rules introduces new compliance risks that business owners must actively manage.

The mandatory PAN linkage with Aadhaar is now a hard requirement for banking operations. An inoperative PAN can trigger TDS at up to 20% — a rate that makes the standard 2% provision look trivial by comparison. Businesses must audit all PAN records across their banking relationships and ensure complete, active Aadhaar linkage before any large withdrawal is initiated.

Banks are now reporting high-value cash transactions to the Income Tax Department under the Statement of Financial Transactions (SFT) framework. Cash withdrawals above ₹10 lakh from savings accounts and current accounts are flagged. This does not mean scrutiny is automatic, but it does mean that businesses whose cash withdrawal patterns are inconsistent with their declared income profiles are more likely to receive notices. The Income Tax Department’s data analytics capabilities have grown considerably, and AI-assisted pattern matching is now a part of the standard scrutiny selection process.

Finally, any attempt to split withdrawals artificially across family members’ accounts or create fictitious payees to avoid the TDS trigger will be treated as a tax evasion attempt rather than legitimate tax planning. The law is clear on the per-account nature of the threshold, and using that structure is perfectly legal — but creating artificial account-splitting arrangements without genuine commercial substance is not.

What Exempted Entities Need to Remember

Certain categories of account holders are exempt from this provision entirely. These include government departments and public sector undertakings, banking companies themselves, cooperative societies engaged in the business of banking, agricultural Produce Market Committees (APMCs), and certain commission agents notified by the government. If your entity falls into one of these categories, proactive submission of the required documentation and declarations to your bank at the start of each financial year is critical — banks cannot process exemptions without the appropriate forms on file.

The Broader Strategic Picture

India’s fiscal policy on large cash transactions is directional and consistent. The government has been progressively tightening the reporting and taxation framework around high-value cash activity since 2016, and each successive budget has reinforced rather than reversed that direction. The 2% TDS on withdrawals above ₹1 crore is not a punitive measure for compliant, return-filing businesses — the effective cost, after accounting for refunds, is manageable and often zero.

The real message embedded in this provision is structural: the Income Tax Department wants every rupee of cash movement above a threshold to have a corresponding paper trail, a PAN record, and an ITR that reconciles income with spending. Businesses that build their financial operations around that principle — using digital payments wherever viable, maintaining current accounts across multiple banks for genuine operational reasons, filing ITRs without exception, and keeping documentation thorough — will find that TDS under this provision costs them nothing except the discipline of good financial hygiene.

Cash still accounts for roughly 50% of India’s payment transactions by value, and for a large section of Indian business, physical currency remains operationally unavoidable. The law does not ask those businesses to stop using cash — it asks them to be transparent, consistent, and compliant while they do. In FY 2026–27, the businesses that will feel this provision most acutely are the ones that have not built that transparency into their financial DNA. For everyone else, it is simply a number to plan around.