Tax implications of Current Accounts for your business

Current Accounts are essential for managing business transactions and cash flows. However, as an Indian business owner, you must understand the tax implications on Current Accounts to ensure compliance and avoid penalties.

Understanding Income Tax implications on Current Accounts

Interest on Current Accounts

Unlike Savings Accounts, Current Accounts do not pay any interest on the account balance. Since Current Accounts are non-interest-bearing, there is no taxable interest income. This simplifies tax calculations for your business.

Bank charges levied on Current Accounts

Any charges or fees levied by the bank on Current Account transactions are treated as business expenses. You can claim these charges as deductions to lower your taxable income. This helps in reducing the overall tax liability of your business.

Tax Deducted at Source: Applicability of Section 194N for Current Accounts

As per Section 194N of the Income Tax Act, TDS is applicable on cash withdrawals exceeding certain limits. This provision also applies to the cash withdrawn from Current Accounts. The TDS rate depends on the tax filing status of your business.

Situation	TDS rate
For cash withdrawals up to ₹20 lakh in a financial year	No TDS is applicable, irrespective of your ITR filing status.
For cash withdrawals between ₹20 lakh and ₹1 crore	No TDS if your business has filed income tax returns for any of the last 3 years.2% TDS if your business has not filed income tax returns for the last 3 years.
For cash withdrawals exceeding ₹1 crore	2% TDS if your business has filed ITR for any of the last 3 years.5% TDS if your business has not filed for the last 3 years.

Note that these limits are calculated per bank and not per PAN. So if you have multiple Current Accounts across banks, the limit is separately considered for each account.

The bank deducts TDS as per the percentage mentioned above and deposits it with the government. You can adjust the amount against the tax liability of your business while filing the business income tax return for the financial year in which TDS was deducted.

GST implications on Current Accounts

Banks levy GST on the bank charges levied on Current Accounts for Overdraft or other services. If your business is registered under GST, you can claim the GST on these charges as an input tax credit. This reduces your GST liability proportionately. However, you must provide your GST number to the bank to avail of this tax credit.

Conclusion

A Current Account is an excellent tool for your business. You can easily create Current Account online and manage your business cash flows efficiently. However, you must ensure that you understand the implications of income tax, TDS and GST on your Current Account to stay tax compliant. Consult with a tax expert to understand how these rules apply to your specific business situation.