Cash Rules Under Income‑tax Law – Simple Do & Don’t List for Small Businesses (From 1‑4‑2026)
This note is for small traders and service providers who still handle cash every day. Cash is not banned, but income‑tax law now fixes strict limits for business expenses, cash receipts, and loans in cash. If you cross these limits, your expenses may be disallowed or you may face penalty equal to the cash amount.
A. Basic limits every small business must remember
| Area | DO – What you should do | DON’T – What you must avoid |
| Cash business expenses (Section 40A (3) ‑type rule) | Pay business expenses to each party per day up to ₹10,000 in cash only; for higher amounts, always use bank transfer, account‑payee cheque, UPI, card or other prescribed modes. | Don’t pay more than ₹10,000 in cash in one day to the same person for purchases, rent, labour, job‑work, commission etc.; such excess cash payments can be disallowed while computing your taxable profit. |
| Cash payments to transporters | For lorry hire or goods carriage, you may pay cash up to ₹35,000 per day per transporter if absolutely necessary; even then, it is safer to use banking channels whenever possible. | Don’t pay a transporter more than ₹35,000 in cash in one day; any extra may be disallowed and raise questions during scrutiny. |
| Cash receipts from customers (Section 269ST‑type rule) | Take cash from any one customer in a day below ₹2,00,000; if the amount is ₹2 lakh or more for one bill, one day or one event, insist on bank transfer/cheque/card. | Don’t receive ₹2,00,000 or more in cash from a person in a single day, or for one transaction, or for one event (marriage booking, property deal, big hospital bill etc.); you may face a 100% penalty equal to the cash received. |
| Cash loans and deposits taken (Section 269SS‑type rule) | Take loans, deposits, partners’ funds and big advances of ₹20,000 or more only through bank (NEFT/RTGS/IMPS), account‑payee cheque or other permitted modes. | Don’t accept ₹20,000 or more in cash as loan, deposit or advance (including property advances and security deposits); penalty can be equal to the amount taken in cash. |
| Cash loans and deposits repaid (Section 269T‑type rule) | Repay loans and deposits of ₹20,000 or more only through bank transfer, account‑payee cheque or other specified non‑cash modes; keep proper confirmation. | Don’t repay ₹20,000 or more of loan or deposit in cash to anyone (including relatives, partners, HUF members); equal‑amount penalty may apply. |
| High‑value cash deposits / withdrawals & PAN | Keep PAN, KYC and books ready if you deposit or withdraw large cash (for example, ₹20 lakh or more in a year) because banks and tax department monitor such movements closely. | Don’t ignore compliance when doing big cash deposits/withdrawals; frequent high‑value cash without explanation can trigger notices and TDS on cash withdrawals under bank‑withdrawal TDS rules. |
B. Day‑to‑day “Do & Don’t” for small traders and service providers
| Area | DO – Good practice | DON’T – Risky practice |
| Daily sales to customers | Encourage UPI, card and bank transfer. If a customer insists on cash, make sure each customer’s total cash for the day stays clearly below ₹2 lakh for that bill or service. | Don’t accept one big cash lump sum for high‑value sales (gold, electronics, cars, big service contracts) when total for that deal may cross ₹2 lakh, even if split over two days for the same transaction. |
| Daily purchases and expenses | Fix one petty‑cash limit (say ₹2,000–₹5,000 per voucher) and one legal limit (₹10,000 per party per day). Train staff to respect both limits. | Don’t break one big bill into many artificial small cash vouchers just to bypass the ₹10,000 rule; the department can club them and disallow the whole amount. |
| Recording cash in books | Enter every cash receipt and payment on the same day in the cash book and match physical cash with book balance regularly. | Don’t keep any “off‑book” cash sales or expenses; mismatch between books, bank and cash in hand leads to additions and penalty at assessment stage. |
| Staff and salary payments | Pay regular staff, professionals and consultants by bank transfer wherever possible. Use cash only for very small daily‑wage or casual workers within reasonable limits. | Don’t pay large monthly salaries or professional fees fully in cash and still expect full deduction; such cash payments can be disallowed or questioned. |
| Security deposits and advances | Take and refund deposits (rent deposits, franchise fees, customer deposits, advances for services) of ₹20,000 or more only through banking channel. | Don’t Park large cash amounts as “deposit” or “loan” to adjust later; if cash crosses ₹20,000, 269SS/269T‑type penalty provisions may apply. |
| Property‑related payments (if any) | For any property purchase/sale or big lease, keep a strict rule that no cash above ₹1,99,000 will be given or taken from any one party for that property; use bank for all substantial payments. | Don’t give or accept large “token”, “advance” or “on‑money” in cash in property deals; such amounts directly fall under the ₹2 lakh cash‑receipt ban and can attract 100% penalty. |
| Handling old cash habits | Slowly move regular cash‑based suppliers and customers to digital mode; explain that new tax rules punish heavy cash and reward banking transactions. | Don’t continue old practice of high cash turnover believing small business will be ignored; present provisions clearly allow both disallowance and heavy penalties on cash violations. |
| Staff training and control | Display a simple chart near the cash counter: “Max cash expense ₹10,000 per party; max cash receipt ₹1,99,999 per person; max cash loan ₹19,999.” Brief front‑office staff on these limits. | Don’t leave decisions on big cash receipts/payments to untrained junior staff; many serious penalties arise simply because the front desk did not know the basic limits. |
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“S. Prasad, Income‑tax & GST Practitioner, Mysore – For educational guidance of small taxpayers and professionals.”
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