Restrictions on cash transactions under Income Tax laws

Restrictions on cash transactions under Income Tax laws

The income tax laws in India have various restrictions on payment in cash and receipt of money in cash in respect of various transactions. Some restrictions apply to those who are engaged in business or profession and some apply to all the persons.

Let us discuss what are such restrictions:

Cash transaction limit on business expenditure

Companies, firms are also not allowed to accept or pay cash beyond a limit. If a business owner transacts for more than Rs. 10,000 in cash, then that amount can not be claimed as an expenditure. For payments made to a transporter, the law provides for a higher threshold of Rs. 35,000/-. This threshold is applicable not only for revenue expenditures but also apply for payments made for acquisition of any fixed asset failing which you will not be able to capitalise that expenditure and claim depreciation on such expenditure paid in cash.

Likewise in case you pay any amount beyond Rs. 10,000 for acquiring any asset, such payment is not allowed to be added to the cost of the asset for the purpose of claiming depreciation. So, effectively this expenditure is also disallowed though over the years and not necessarily in the year of payment.

Restrictions applicable to all the persons

Restrictions on acceptance and repayment of loan

The tax laws have provisions under which you are not allowed to accept or repay any loan beyond the initial limit of Rs 20,000. Though it does not have any impact on your tax liability, but in case of default, the tax officer can levy a penalty equal to the amount of loan accepted or repaid. This threshold is not applicable for each of the transactions of a loan but will apply to every transaction irrespective of the value, once the outstanding amount of loan exceeds Rs 20,000, including the payment being made. Likewise repayment of even a single rupee cannot be made in cash if the balance in the loan account is more than 20,000 at the time of repayment. The acceptance or repayment can be made in cash as long as the balance in the loan account does not exceed the threshold of twenty thousand rupees.

The restrictions in respect of loans are not applicable for transactions with bank, government, Government Company or corporation and other entities if specified by the government. Your home loan will not get covered under these restrictions and you can repay your home loan in cash beyond twenty thousand rupees.

For tax-saving instruments

If you are doing any tax-saving investment to claim deduction under Section 80C or any other section like Section 80D. 

When doing your tax planning, ensure that you don’t pay for health insurance in cash. The law does not allow the taxpayer to take benefit of Section 80D if he pays the insurance premium in cash. It has to be done mandatorily through the banking channel. However, you can claim deduction upto Rs. 5,000/- for your family and your parents each for cash paid for preventive health check-up under Section 80 D within the maximum amount admissible under Section 80D.

For cash donations made, you can claim the deduction under Section 80G only if the amount of each donation does not exceed Rs. 2,000/-. For donations made beyond this threshold no deduction is available if the same is made in cash.

Restrictions on receipt of cash by any person

In order to put check on use of cash in high value transactions, the government has put a blanket ban on acceptance of cash beyond 2 lakhs by any person under Section 269ST. It is for each occasion like marriage, birthday party etc. or for each transaction like sale of gold, immovable property, holiday package, renovation/furnishing of property etc. for which this restriction will apply. It may happen that the payer does not claim tax deduction for it but the restriction on recipient will still apply.

This provision has been brought in to curb the use of black money on various occasions like marriage, travel etc. and for which no deduction is claimed by the payer under the tax laws. For example, a caterer cannot accept Rs 2 lakh and more in aggregate for marriage reception form one person whether on a single day or over the period. Likewise, though there are no restrictions on receiving payment for sale of anything like gold Jewellery, house or a plot of land etc. in general, but if the value of a single transaction is more than Rs 2 lakh, the seller cannot receive more than two lakh rupees either in full or in part for such transactions.

Likewise you cannot receive any gift beyond Rs 2 lakh in cash even in cases where the gifts are not treated as your income such as gifts received at the time of your marriage or from specified relatives. In case you receive payment in contravention of the above provision, the income tax officer can levy a penalty equal to the amount of money accepted in cash. Please note that there are no penal consequences for the person who is paying such money. The restriction of Rs 10,000 as discussed above is applicable for the person who wishes to claim it as business expenditure.

Withdrawal from Post Office

  • Post offices under the Department of India Post facilitate drawings from Post Office savings account along with ATM facility.
  • The limit of cash that can be withdrawn in a single day from a post office or ATM is Rs.25,000 and is limited to Rs.10,000 per transaction.
  • The post office permits five free transactions per month including financial and non-financial transactions (balance enquiry, statement request). Beyond the free transactions, Rs.20 with GST is charged.
  • Withdrawal from other bank ATMs is admissible wherein it is upto 3 free transactions in metro cities while it is five free transactions in non-metro cities. A fee of Rs.20 with GST is charged for transactions above the free transactions.

Withdrawal from Banks

The amount deposited can be withdrawn from both savings account and current account using a cheque book/withdrawal slip or using automated teller machine through a debit card. Cash withdrawal limit varies from bank to bank and also depends on the type of card being used. It varies from 10,000 to 50,000 per day based on the bank. However, the transaction details notified by the State Bank of India is furnished below.

  • Withdrawals using cheque book has been restricted to 60 withdrawals per half-year by most of the banks.
  • The amount of money that can be debited from the current account is limited to Rs.1,00,000 per week whereas an overall of Rs.24,000 can be drawn per week from the savings account.
  • ATM withdrawals allow Rs.10,000 to be drawn per day and permits unlimited free transactions for salary account whereas 3 transactions from other ATMs with a fee of Rs.20 plus GST per month.

Cash Transaction Limit under Income Tax

The following are the main income tax sections that pertain to cash transaction limit:
  1. Section 40A(3) and Section 43 – Pertains to Cash Payment
  2. Section 269SS and Section 269ST – Pertains to Cash Receipts
  3. Section 269T – Pertains to Repayment of Certain Loans / Deposits

Section 40A(3) of Income Tax

Section 40A(3) of the Income Tax Act pertains to cash transaction limit for expenditure made in cash. Under Section 40A(3), if payment for any expenditure of over Rs.10,000 is made in cash, then the expenditure will be disallowed under the Income Tax Act. Hence, it is important for all taxpayers to make any payment for the expense over Rs.10,000 through banking channels like debit card, account transfer, cheque or demand draft.

Section 43 of Income Tax

Under section 43 of Income Tax Act, if payment of more than Rs.10,000 is made by a taxpayer for the acquisition of an asset by cash, the expenditure would be ignored for the purposes of determination of actual cost of the asset. Hence, it is important for all taxpayers acquiring assets to make all payments to the seller through banking channels.

Section 269SS: Prohibition on acceptance of cash loans, deposits etc.

A person cannot accept loan or deposit or any other specified sum from another person otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, if –

i. Amount of loan or deposit or specified sum is Rs. 20,000 or more, or
ii.  Sum total amount of loan, deposit and the specified sum is Rs. 20,000 or more
iii. In a case where a person had already received a loan, deposit or specified sum from the depositor but the loan or deposit or specified sum hasn’t been paid back in such case, if the unpaid loan or deposit or-specified sum is Rs. 20,000 or more, or
iv. The aggregate of amount referred above is Rs. 20,000 or more. 

Therefore, a person cannot accept cash loan or deposit of Rs. 20,000 or more from another person.

Penalty: 100% of the loan amount shall be the quantum of penalty than can be levied.

Section 269T: Prohibition on repayment of loans or deposits in cash

The section prohibits any person to repay the loan or deposit or specified sum otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account, if –
1. Amount of loan or deposit, including interest amount, is Rs. 20,000 or more, or
2. The aggregate amount of loans or deposits, including the interest amount, held by such person in his own name, or jointly with any person, is Rs. 20,000 or more.

Hence a person cannot repay the loan or deposit in cash, if the amount is Rs. 20,000 or more.
Penalty: 100% of the loan or deposit amount may be leviable.

Section 269ST : Non-Applicability

1. Any amount received by-
– Government;
– any banking company, post office savings bank or co- operative bank;
2. Transactions of the nature referred to in section 269SS;
3. Such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify.

Penalty: Any person who enters into such a transaction in cash, will be liable to a penalty of an amount equivalent to the amount of transaction receipt under Section 271DA.

Some illustrations for a better understanding:

1. Single Person: Cash receipt of INR 2 lakh or more received in multiple transactions from a single person in a day.

Example: Mr. Ankit buys a jewellery for his wife worth Rs. 2 lakh and pays the amount to the Jeweller Mr. Yash in 5 equal instalments on a single day. Since, Mr. Yash has accepted Rs. 2 lakhs in cash, Section 269ST is applicable and Mr Yash has to pay a penalty of Rs. 2 Lakh.

2. Single Transaction: Cash Receipts of INR 2 lakh or more received in instalments for a single transaction.

Example: Mr. Ankit had a surgery in the hospital worth Rs. 5 lakhs. Mr Ankit paid off the bill in 5 equal instalments on 5 different dates. Even if each of the transaction is less than Rs. 2 lakhs, the hospital has received cash above 2 lakhs in total with regard to a single transaction/bill. Hence, Section 269ST shall be applicable and the hospital has to pay the penalty.

3. Single Event/Occasion: Cash Receipts related to a single event/occasion cannot me more than INR 2 Lakh.

Example: Mr. Ankit accepts an order of catering and tent for a marriage event. He accepts cash of Rs. 1,50,000 for catering and Rs. 1,00,000 for tent. The section shall be applicable irrespective of cash received in different dates. All the cash transactions are related to a Single Occasion. And hence, penalty shall be leviable.

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Posted By Ramesh Kumar Gupta

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