Income Tax Provisions relating to Cash Transactions in India

India has been categorized as a cash based economy since long. People are more comfortable in using cash as no prior authorization is required, no transaction charges are there, no technical knowledge is required, cash cab be used anonymously and also tax evasion become easier.

In Past decade Govt. has taken various steps and has introduced/amended various provisions in Income Tax Act, 1961 to discourage cash transactions and encourage cashless transaction. These steps include prohibiting and penalizing various transactions in cash, disallowing cash expenditure, reporting of cash transactions to Income tax department etc. In this article, we will briefly discuss about various provisions in The Income Act, 1961 relating to cash transactions.

Penalty Provisions:

Taking/Accepting Loans or Deposits or Specified Sums: A person cannot accept any Loan or Deposit or Specified Sum* of ₹20000/- or more in cash from another person. If provisions are violated then the person accepting loan in cash shall be liable to a penalty equivalent to the amount of loan accepted in cash (Section 269SS).

Repayment of Loans or Deposits or Specified Sums: A person cannot repay any Loan or Deposit or Specified Sum* of ₹20000/- or more in cash to another person. If provisions are violated then the person accepting loan in cash shall be liable to a penalty equivalent to the amount of loan repaid in cash (Section 269T).

Accepting any other amount in cash: A Person shall not receive an amount of ₹2.00 Lacs/- or more :

1. In aggregate from one person in one day; or
2. In respect of a single transaction; or
3. In respect of a transaction relating to one event or occasion from one person.

The aforesaid provisions are not applicable to:

1. Government;
2. Any banking company, post office savings bank or co-operative bank
3. Transactions referred to in section 269SS
4. Such other persons as may be notified by Central Govt.

If any person receive any amount in contravention of the aforesaid provisions than he shall be liable to a penalty equivalent to the amount received in contravention of these provisions (Section 269ST).

Disallowance of Business Expenditure:

Disallowance of Revenue Expenditure: In case any payment made is to a person in cash exceeding ₹10,000/- in respect of any expenditure then no deduction shall be allowed in respect of such expenditure while calculating business/profession income. (In case of Transport Business limit for cash Expenditure in ₹35,000/- instead of ₹10,000/-) [Section 40A(3)/(3A)].

Disallowance of Capital Expenditure: In case any payment is made exceeding ₹10,000/- in cash in respect of purchase/acquisition of any capital assets then such capital expense shall not become part of cost of the capital asset and consequently no depreciation shall be allowed in respect of such Capital expenditure.

Disallowance of Deductions under Chapter VI

Donations to Charitable institutions/Funds: Any Donations made to Charitable funds/Institutions exceeding ₹2000/- in cash will not be eligible for deduction under section 80G. [Section 80G(5D)].

Donations to Political Parties: Any Donation made to any Political Party or Electoral Trust in cash shall not be eligible for deduction under Chapter VI (Section 80GGB/80GGC). 

Reporting of Cash Transactions under section 285BA (SFT Reporting):

Section 285BA deals with reporting of certain specified transactions to the Income Tax department on annual basis. Following Cash transactions are covered in the scope of SFT reporting and will be reported to The Income Tax Department:

• Cash Deposits of ₹10.00 Lakhs or more in Saving A/c during a financial year.
• Cash Deposits/Withdrawal of ₹50.00 Lakhs or more in a Current A/c during a Financial Year.
• Deposits of ₹10.00 Lakhs or more in Time deposits/Fixed Deposits during a financial year.
• Payment of Credit Card bill exceeding ₹1.00/- Lac in cash

Relaxed Provisions relating to Presumptive Taxation:

 Section 44AD of the Income Tax Act. 1961 deals with presumptive taxation. A person adopting Presumptive taxation scheme can declare income at a predetermined/prescribed rate and is not required to maintain books of accounts and also not required to get his accounts audited. Upto Financial year 2015-16 Income was computed at the rate of 8% of the turnover or gross receipts but from financial year 2016-17 onwards an amendment was made to promote digital payments and it was provided in the amendment that Income shall be computed at the rate of 6% instead of 8% if turnover/gross receipt is received by an account payee cheque or account payee bank draft or electronic clearing system through bank or any other electronic mode as may be prescribed.

Relaxed Provisions relating to Tax Audit under Income Tax Act:

Section 44AB deals with provisions relating to Audit of accounts. An amendment was made in this section by Finance Act 2021 w.e.f 01/04/2021 according to which if aggregate of amount received in cash for sales/turnover/gross receipts does not exceed 5% of such amount (all sale/turnover/receipts) and aggregate of payments made in cash does not exceed 5% of such amount (total payments) then threshold limit for getting accounts audited will be ₹10/- crores instead of ₹1.00/- crore.

All the aforesaid provisions discourage cash based transactions and are helping India in moving towards the direction of Cashless (or Less Cash) economy.

Note: * Specified Sum means any amount related to transfer of immovable property.