Income Tax implications on Cash Transactions

In the Indian economy, cash transactions have always played a major role and serve as a consistent reason for the accumulation of black money. The government has recently launched various measures to curb cash transactions and boost digital payments. In this article, we will look at the cash transaction limit under the Income Tax Act along with the penalty for cash transactions over and above the specified limit. In this article, let us have a look at the Income Tax implications on Cash Transactions.

Limit for cash transactions under Income Tax

Below are the main sections of income tax that relate to the cash transaction limit:

• Section 40A (3) and Section 43 – refer to payment in cash
• Section 269SS and Section 269ST – relate to cash receipts
• Section 269T – refers to the repayment of certain loans/deposits

Section 40A (3) Income Tax Act

Section 40A, sub-section 3 of the Income Tax Act refers to the cash transaction limit for expenses made in cash. According to Section 40A(3), if payment for any expenditure exceeding Rs.10,000 is made in cash, then the expenditure will be disallowed under the Income Tax Act. Therefore, all taxpayers need to make any payment for expenditures above Rs. 10,000 through banking channels such as debit card, account transfer, check, or draft.

Section 43 Income Tax Act

As per Section 43 of the Income Tax Act, if a taxpayer makes a payment of more than Rs 10,000 for the acquisition of an asset in cash, the expenditure will be ignored to determine the actual cost of the asset. It is therefore important for all taxpayers acquiring assets to make all payments to the seller through banking channels.

Section 269SS Income Tax Act

Section 269SS prohibits a taxpayer from taking/accepting loans or deposits or an amount exceeding Rs 20,000 in cash. All loans and deposits above Rs 20,000 must always be taken through the banking channel. However, the provision of Section 269SS of the Income Tax Act does not apply when taking a loan or deposit from the person or entity listed below:

• Government;
• Any banking company, postal savings bank, or cooperative bank;
• Any company established by a Central, State, or Provincial Act
• Any public company as defined in subsection (45) of section 2 of the Companies Act 2013
• An institution, association, body, or class of institutions, associations, or bodies notified by the Central Government in the Official Gazette.

Finally, if the person from whom the loan or deposit is received and the person who accepted the loan or deposit both have income from agriculture and neither of them has income taxable under the Income Tax Act, then the provisions of Section 269SS do not apply. 

Penalty- Failure to comply with the provisions of section 269SS may result in a penalty equal to the amount of the loan or deposit or the specified amount received.

Section 269ST Income Tax Act

This provision provides that no person can receive an amount of INR 2 Lakhs or more in cash:

• Aggregate per person per day;
• For a single transaction; or
• When it comes to transactions relating to a single event or occasion from a person.

The provisions of section 269ST shall not apply if he receives cash over 2, 00, 000 rupees from the following persons:

• Government;
• Any banking company, postal savings bank, or cooperative bank;
• An institution, association, body, or class of institutions, associations, or bodies notified by the Central Government in its Official Gazette.

Penalty- According to section 271DA, in case of non-compliance with the provisions of section 269ST, a fine equal to the amount of the receipt is payable.

Section 269T of the Income Tax Act

Section 269T provides that no branch of a banking company or co-operative, firm, or another person may repay any loan or deposit other than by an account payee’s check or an account payee’s bank draft drawn in the name of the person who made the loan or deposit, if:

• The loan or deposit amount, including interest, is INR 20,000 or more; or
• The aggregate amount of loans or deposits held by such a person, whether on his behalf or jointly with another person, on the date of such repayment, together with interest, is INR 20,000 or more.

The provisions of section 269T do not apply if the loan is repaid or received or an advance is received from a person named below:

• Government;
• Any banking company, postal savings bank, or cooperative bank;
• Any company established by a Central, State, or Provincial Act
• Any public company as defined in subsection (45) of section 2 of the Companies Act 2013
• An institution, association, body, or class of institutions, associations, or bodies notified by the Central Government in the Official Gazette.

Penalty- According to section 271E, in the event of failure to comply with the provisions of section 269T, a fine equal to the repaid amount of the loan or deposit is payable.

Final words

Cash transactions have traditionally played a significant role in the Indian economy and have been a perennial cause of the accumulation of black money. The government has set various limits on cash transactions from time to time to fight black money. Paying or receiving cash above these limits is punishable by a hefty fine of up to 100 percent of the amount paid or received.