Income Tax Notice For Cash Transaction
The limits on cash transactions and their legal consequences can differ from one country to another. The government of India has introduced stringent regulations on cash transactions that aim to tackle tax evasion and encourage digital payments.
These regulations are mainly outlined in several sections of the Income Tax Act of 1961, specifically sections 269SS, 269ST, and 40A(3)
Section 269SS
As per section 269SS of the Income Tax Act, 1962 (Chapter XXB – Requirements as to mode of acceptance, payment or repayment in certain cases to counteract evasion of tax) which talks about the “Mode of taking or accepting certain loans, deposits and specified sum” explains –
“No person shall take or accept from any other person (herein referred to as the depositor), any loan or deposit or any specified sum, otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, if,—
(a) the amount of such loan or deposit or specified sum or the aggregate amount of such loan, deposit and specified sum; or
(b) on the date of taking or accepting such loan or deposit or specified sum, any loan or deposit or specified sum taken or accepted earlier by such person from the depositor is remaining unpaid
(whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid; or
(c) the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b) is twenty thousand rupees or more.”
Section 269ST
As per section 269ST of the Income Tax Act, 1962 (Chapter XXB – Requirements as to mode of acceptance, payment or repayment in certain cases to counteract evasion of tax) which talks about the “Mode of undertaking transactions” explains –
“No person shall receive an amount of two lakh rupees or more—
(a) in aggregate from a person in a day; or
(b) in respect of a single transaction; or
(c) in respect of transactions relating to one event or occasion from a person, otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account.”
Section 269T
As per section 269T of the Income Tax Act, 1962 (Chapter XXB – Requirements as to mode of acceptance, payment or repayment in certain cases to counteract evasion of tax) which talks about the “Mode of repayment of certain loans or deposits” explains –
“No branch of a banking company or a co-operative bank and no other company or co-operative society and no firm or other person shall repay any loan or deposit made with it or any specified advance received by it] otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or deposit or paid the specified advance, or by use of electronic clearing system through a bank account
if—
(a) the amount of the loan or deposit 3[or specified advance] together with the interest, if any, payable thereon, or
(b) the aggregate amount of the loans or deposits held by such person with the branch of the banking company or co-operative bank or, as the case may be, the other company or co-operative society or the firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such loans or deposits, or
(c) the aggregate amount of the specified advances received by such person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such specified advances,
is twenty thousand rupees or more:
Provided that where the repayment is by a branch of a banking company or cooperative bank, such repayment may also be made by crediting the amount of such loan or deposit to the savings bank account or the current account (if any) with such branch of the person to whom such loan or deposit has to be repaid.”
Section 40A(3)
As per section 40A(3) of the Income Tax Act, 1962 talks about the “Expenses or payments not deductible in certain circumstances” explains –
“Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account, exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure.”
For payments to transporters, this limit is raised to rupees thirty-five thousand.
Legal Implications
As per section 271D of the Income Tax Act, 1961, Penalty for failure to comply with the provisions of section 269SS –
If a person takes or accepts any loan or deposit or specified sum in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit or specified sum so taken or accepted.
Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.
As per section 271DA of the Income Tax Act, 1961, Penalty for failure to comply with provisions of section 269ST –
If a person receives any sum in contravention of the provisions of section 269ST, he shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt:
Provided that no penalty shall be imposable if such person proves that there were good and sufficient reasons for the contravention.
Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner.
Best Practices for Compliance
Keep Accurate Records: Ensure the proper documentation of cash transactions, including receipts and invoices.
Steer Clear of Large Cash Transactions: Opt for banking or digital payment methods for high-value deals.
Familiarize Yourself with Local Regulations: Keep up to date on the cash transaction limits in your country to prevent unintentional violations.
Utilize Accounting Software: Take advantage of applications such as QuickBooks, Tally, or Zoho Books to efficiently monitor cash inflows and outflows.
Want To Know More About TDS on Cash Withdrawal Click Here
FAQs
What is the maximum amount that can be paid in cash?
Single Transaction Limit (Section 269ST): Cash payments exceeding ₹2,00,000 in a single day, to a single person, or for a single event/occasion are prohibited. Penalty: 100% of the amount received in contravention.
Business Expenses (Section 40A(3)): Cash payments exceeding ₹10,000 per day per person (₹35,000 for payments to transporters) are disallowed as business expenses.
Donations: Cash donations exceeding ₹2,000 are not eligible for tax deductions under Section 80G.
Loans/Deposits: Cash transactions exceeding ₹20,000 for loans or deposits are prohibited under Section 269SS/269T.
Can salary be paid in cash excess of RS 10,000?
Indeed, tax deductions can be applied to cash salary payments exceeding Rs. 10,000 in specific extraordinary situations. Additionally, you are permitted to make cash payments of up to Rs. 50,000 for employee termination benefits to qualify.
How much cash transaction is legal?
Section 269ST prohibits a person (recipient) from receiving an amount of Rs. 2 lakhs or more except through an account payee cheque, account payee bank draft, or by utilizing an electronic clearing system via a bank account or other designated electronic methods.
Is there a limit on how much cash I can hold at home?
Although there isn’t a defined limit on how much cash you can keep at home, it’s important to be able to explain any significant sums to prevent scrutiny from tax authorities.
Can I receive cash payments from multiple transactions on the same day?
No, Section 269ST forbids accepting cash amounts of ₹2 lakhs or more in total from a single individual in a single day or for a specific transaction.
Cash transaction threshold limit
The Income Tax Department has issued guidelines on regulating cash transactions and encouraging taxpayers to move towards digital payments, through recently issued Part-2 of the ‘Say No to Cash Transactions’ brochure. It aims at formalizing the economy, preventing unaccounted money, and ensuring that tax laws are complied with. Here are the key provisions summarised for better understanding:
Provisions of Penal Nature
Donations to Political Parties
Under Sections 13A and 13B, political parties registered under the Representation of the People Act, 1951, cannot accept donations exceeding Rs 2,000 in cash. Electoral Trusts violating this limit lose tax exemptions.
Hundi Transactions
As per Section 69D, borrowing or repaying amounts on hundis in cash is deemed as income of the borrower or payer in the financial year of the transaction.
Restricting Cash Transactions
Disallowance of Expenses (Section 40A)
i) Payments exceeding Rs 10,000 in cash toward business expenses are not allowed as deductions.
ii) For goods carriage, the limit is Rs 35,000 per day.
iii) Payments for prior-year liabilities exceeding Rs 10,000 in cash will be deemed as income in the year of payment.
iv) Exceptions apply to payments made to cultivators for agricultural produce.
Depreciation Disallowance (Section 43)
Cash payments exceeding Rs 10,000 toward asset acquisition will not be included in the asset’s actual cost, and depreciation cannot be claimed.
Donations Under Chapter VI-A
i) Donations exceeding Rs 2,000 in cash under Section 80G are disallowed for deductions.
ii) For scientific research or rural development under Section 80GGA, the limit is also Rs 2,000.
iii) Contributions to political parties under Sections 80GGB and 80GGC must be made in non-cash modes to qualify for deductions.
iv) No deductions under section 80JJAA if payments are made in cash in respect of employment to new employees.
Incentives for Cashless Transactions
Lower Tax Rates for Digital Receipts (Section 44AD)
Businesses opting for cashless transactions benefit from a reduced presumptive tax rate of 6% instead of 8% on gross receipts or turnover.
Tax Audit Threshold (Section 44AB)
The tax audit threshold for businesses has been raised to Rs 10 crore if cash receipts and payments do not exceed 5% of total transactions.
Tax Deductibility and TDS Rules
TDS on Cash Withdrawals (Section 194N)
i) 2% TDS applies to cash withdrawals exceeding Rs 1 crore from banks, co-operative societies, or post offices.
ii) For non-filers of income tax returns, TDS applies at 2% on withdrawals between Rs 20 lakh and Rs 1 crore, and 5% beyond Rs 1 crore.
TDS on Contractual Payments (Section 194M)
Individuals or HUFs paying sums exceeding Rs 50 lakh in a year for contractual work or professional services must deduct 5% TDS, regardless of payment mode.
Mandatory Return Filing and Penalties
Seventh Proviso to Section 139(1)
Individuals or entities must file income tax returns if they:
i) Deposit Rs 1 crore or more in current accounts.
ii) Spend over Rs 2 lakh on foreign travel.
iii) Incur electricity expenses exceeding Rs 1 lakh annually.
Section 234F
A penalty of Rs 5,000 is levied for late filing of income tax returns.
Key Exceptions
i) Rule 6DD exempts certain cash payments, such as purchases of agricultural produce from cultivators, from restrictions under Section 40A.
ii) Preventive health check-ups under Section 80D are allowed in cash, although premiums must be paid digitally.