Understanding the tax on a Current Account is an important aspect of managing the finances of your business. Paying less tax can invite penalties while paying too much eats into your profits. The best approach is to be savvy about current income tax and safeguard your business revenue and finances.
Tax implications for Current Account holders
Typically, businesses tend to transact much more than individuals. Financial transactions include cash deposits, cash withdrawals and transfers. However, a Savings Account usually has a cap on the number of transactions, as well as the value. Hence, it is unsuitable for businesses - especially, as they scale.
This is where a Current Account comes with the advantage of unlimited transactions and a larger cash deposit limit. This account also enables higher overdraft facilities and superior payment solutions, among other benefits. Entities such as sole proprietorships, LLPs and private and public companies, can open a Current Account.
Current Account interest rates and taxation
Unlike a Savings Account, your Current Account does not generate interest, no matter how much the account balance. Hence, this is a tax-free account where no income tax on the Current Account is deducted. However, there are some taxable events in Current Account management.
For instance, Tax Deducted at Source (TDS) applies once cash withdrawals cross the threshold of the Current Account tax limit in India. This amount can be claimed when filing your company’s tax returns. But it is helpful to be aware of the Current Account limit without tax.
However, taxable transactions on Current Accounts cannot be isolated, and the income tax applicable depends on the taxable income from Current Account, or multiple accounts. There are also no capital gains tax on Current Accounts, since this account does not earn any interest. Nevertheless, tax planning for Current Account holders is important just as it is for any individual. For instance, corporate tax planning for Current Accounts can help reduce tax liabilities for larger corporations and multi-nationals.
TDS on cash withdrawals from Current Accounts
There is no income tax on Current Accounts. However, under Section 194N of the Income Tax Act, banks are required to deduct tax at source when the aggregate sum of cash withdrawals exceeds a certain limit. If you have more than one Current Account in a bank, then the aggregate cash withdrawal is considered. The status of Income Tax Returns (ITR) filing also plays a role. Withholding taxes on Current Account transactions can invite penalties to the bank; hence, this is an important step.
Here's a look of taxable withdrawals from Current Accounts that attract TDS:
1. Aggregate cash withdrawals up to ₹20 lakh
There is no TDS on aggregate cash withdrawals of up to ₹20 lakh if ITR has been filed for any of the last three years, and also if it has not been filed for all of the last three years.
2. Aggregate cash withdrawals between ₹20 lakh and ₹1 crore
- There is no TDS if ITR has been filed for any of the last three years.
- 2% of TDS applies if ITR has not been filed for all of the last three years.
3. Aggregate cash withdrawals above ₹1 crore
- 2% of TDS applies if ITR has been filed for any of the last three years.
- 5% of TDS applies if the ITR has not been filed for all of the last three years.
Also Read: Current vs Savings Account: Difference between Current Account and Savings Account
Summary
Understanding the income tax on a Current Account is important to ensure efficient financial management in your business books. It helps in tax planning for Current Accounts, which is the main account for running a business. For instance, there is no taxation of interest earned on Current Accounts since there is no interest earned. Taxation of cash flow in Current Accounts, depends on the overall income tax applicable to the business.
Axis Banks offers several Current Account products that can help streamline all financial transactions and make each account more tax-efficient. Your Current Account gives you access to sufficient overdraft facilities, Forex services, superior payment solutions, unlimited transactions, and a cash deposit limit relevant to your business needs.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
