Restrictions on Cash Transactions under Income Tax Laws

Restrictions on Cash Transactions under Income Tax Laws by CA. Balwant Jain

The tax laws have various restrictions on payment in cash and receipt of money in cash. Some restrictions apply to those engaged in business or profession and some others to all. It is important for all of us to understand these restrictions so as to avoid the penal consequences.

Restrictions on those carrying on business or profession

If you are carrying on business or profession, the tax laws have a daily cap of Rs. 10,000/- beyond which payments in cash cannot be made for any expenditure to a single person. If you fail to do so, the expenses paid in cash will not be eligible for tax deduction. There is one exception to this rule and you can pay upto Rs. 35,000/ to a transporter in a day without attracting the disallowance.

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.

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 transaction 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 as long as the balance in the loan account does not exceed twenty thousand rupees.

The restrictions in respect of loan 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.

Restrictions in respect of certain deductions available from your income

In respect of certain payments for which you are eligible to claim deduction from your taxable income, the tax laws have some ceiling for making payment in cash. Deduction under Section 80D is not admissible if the premium for the health insurance is paid in cash. However payment for preventive health check, for which there is a sub limit of Rs. 5,000/- under Section 80D, can be made in cash. The restrictions of cash payment will also apply in case of deduction for medical expenses for a senior citizen who does not have health insurance.

Likewise deductions for certain donations under Section 80G cannot be claimed if donation beyond Rs. 2,000/- is made in cash. The restriction of Rs. 2,000/- is applicable for each donation and not for all donations in aggregate.

Blanket restrictions on acceptance of money beyond two lakhs

The tax laws have one more all pervasive restrictions under Section 269ST whereby a blanket restriction has been placed on receipt of money by any person for an amount of two lakhs and above. This restriction is applicable to the recipient and not the payer. The restriction is applicable in respect of receipt of money for each occasion or for each transaction and not necessarily for payment in a single day. This provision has been brought in to curb 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 two lakhs and more in aggregate for marriage reception form one person whether on a single day or over the period. Likewise though there is 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 single transaction is more than two lakhs, the seller cannot receive more than two lakhs either in full or in part for such transactions.

Likewise you cannot receive any gift beyond two lakhs 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 received. 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 if one wishes to claim the same as business expenditure.

I am sure the above discussion will help to be careful while making or receiving payments in cash.

The author is Chief Editor ApnaPaisa and can be reached on [email protected]

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Balwant Jain is Chief Editor of ApnaPaisa and a tax and investment expert. He is a rank holder CA, CS of 1983 batch, and a Certified Financial Planner (CFP). He has varied experience in providing his own consultancy, as well as working as the chief financial officer, as well as a company secretary. He has been regularly contributing articles to leading business and mainline dailies, as well as electronic media. He regularly appears on business channels like Zee Business and CNBC Awaaz, as a personal finance and taxation expert. He has also been a visiting faculty of NMIMS (Narsee Monjee Institute of Management Studies), Mumbai. He also regularly conducts workshops on various subjects of investments and taxation.


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