In India, cash withdrawal limits that trigger an income tax notice work on two separate tracks. Your bank must deduct 2% TDS once your cash withdrawals for the year cross ₹1 crore under Section 194N, and only ₹20 lakh if you haven’t filed income tax returns for the previous three assessment years. Separately, banks report current-account cash withdrawals of ₹50 lakh or more, and cash deposits into savings accounts of ₹10 lakh or more, to the Income Tax Department through the Statement of Financial Transactions. A notice usually follows when those reported amounts don’t line up with the income on your return.
The Two Thresholds That Actually Matter
The TDS threshold and the reporting threshold are different numbers, and confusing them is the reason many people are caught off guard.
Under Section 194N, every bank, cooperative bank, and post office adds up all the cash paid out from your accounts at that institution during the financial year. Once the running total crosses ₹1 crore, TDS at 2% applies to the excess. If you have not filed a return for all three assessment years immediately before the current one, and the Section 139(1) deadline for those returns has passed, the threshold drops to ₹20 lakh. Non-filers withdrawing above ₹1 crore face 5% TDS on the amount above ₹1 crore, on top of the 2% already applied to the slice between ₹20 lakh and ₹1 crore.1Income Tax Department. TDS on Cash Withdrawals
The aggregate is calculated across every account you hold at the institution, and different branches of the same bank count together. It isn’t a per-transaction limit; the bank tracks your cumulative withdrawals for the whole year.
The reporting threshold under Section 285BA is lower. Banks file a Statement of Financial Transactions covering:
- Current account cash withdrawals aggregating ₹50 lakh or more in a financial year
- Cash deposits into savings accounts aggregating ₹10 lakh or more
- Current account cash deposits aggregating ₹50 lakh or more
Because the SFT numbers are lower than the 194N numbers, the department often knows about your cash activity well before any tax is withheld.2Income Tax Department. Statement of Financial Transaction
TDS Under 194N Is Not the Notice
When your bank deducts 2% or 5% under Section 194N, that money is not a fine. It is advance tax credited to your PAN, and it appears in your Form 26AS and Annual Information Statement. When you file your return, the deducted amount is set off against your tax liability for the year, and any excess comes back as a refund.
If you don’t file a return, the TDS stays with the government. For non-filers who had money deducted at the 2% or 5% rate, the only way to get it back is to start filing.1Income Tax Department. TDS on Cash Withdrawals
What Actually Triggers the Notice
The notice is triggered by a mismatch, not a withdrawal on its own. When the SFT data on your cash withdrawals or deposits sits alongside your filed return and the two don’t fit, the system flags it. Withdrawing ₹40 lakh in cash while reporting ₹8 lakh in annual income is the kind of gap that generates automatic scrutiny.
Two provisions carry most of these communications. A notice under Section 142(1) is an inquiry from the assessing officer during an assessment, asking for specific information or documents. A notice under Section 131(1A) lets an officer make inquiries when there is reason to suspect concealed income, even before any formal proceeding has started. Either way, the communication lands on your e-filing portal account and tells you what the department wants to see.
The notice itself is a request for explanation, not a penalty. Most cases resolve without further action when the taxpayer documents where the cash came from and what it was used for. People get into trouble by ignoring the notice or sending in a thin response.
How to Respond and What to Have Ready
Responses go through the e-Proceedings section of the e-filing portal at incometax.gov.in. Log in, open Pending Actions, select e-Proceedings, view the notice, and submit your written response along with supporting documents. The system generates a Transaction ID once you submit; keep it, because it is your proof that you responded on time.3Income Tax Department. e-Proceedings User Manual
An outstanding demand notice, where the department says you owe a specific amount, follows a different path: Pending Actions, then Response to Outstanding Demand.4Income Tax Department. Respond to Outstanding Demand User Manual
The response is only as strong as the documents behind it. Before you draft anything, pull together:
- Complete bank statements for the full financial year for every account linked to your PAN at the institution in question, with the flagged transactions highlighted
- A cash ledger or cash book showing what each withdrawal was used for; if you run a business this should already be in your books, otherwise reconstruct it from receipts and records before responding
- Invoices, receipts, and contracts for cash payments to vendors, workers, or suppliers
- Gift deeds or loan agreements if any cash came in from those sources, plus evidence that the other party had the capacity to give or lend that amount
- Agricultural income records, including mandi receipts or buyer confirmations, if the cash relates to farm produce sales
Arrange everything chronologically so it lines up with your bank statement. An assessing officer will match each withdrawal to a stated purpose, and unexplained gaps invite follow-up.
The Trap on the Payment Side
Withdrawing cash legally is one issue; spending it is another. Section 269ST prohibits accepting ₹2 lakh or more in cash from a single person in a day, in a single transaction, or in connection with a single event or occasion. The penalty under Section 271DA is 100% of the amount received, which falls on the recipient. Business owners who withdraw large sums and then pay suppliers or contractors in cash routinely put those recipients on the wrong side of this rule. Payments through cheque, NEFT, or RTGS avoid the problem and leave the paper trail you will want if a notice ever arrives.5Income Tax Department. Mode of Receipts and Payments in Certain Cases
What Happens If You Ignore the Notice
If you miss the deadline stated in the notice, the assessing officer can proceed with a best judgment assessment. That means they estimate your income using the SFT data and bank reports they already have, without your explanation. The resulting tax demand is almost always higher than what you would have owed after a documented response.
Failure to respond can also bring penalties and interest. Your return may be treated as invalid, which can cost you the ability to carry forward losses or claim certain exemptions, and can push you into the non-filer category for future years. Once that happens, your Section 194N threshold drops from ₹1 crore to ₹20 lakh, and the next round of withdrawals gets taxed much earlier.6Income Tax Department. e-Proceedings FAQ
Respond within the deadline even if your documentation is incomplete. A partial response with honest explanations reads far better than silence, and you can supplement it later through the same e-Proceedings portal.