Restrictions on Cash Payments Under Income Tax Act 

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 initiated various measures to determine the cash payment limit and boost digital payments. In this article, we look at the cash transaction limit per day under the Income Tax Act along with the penalty for transacting in cash over and above the specified threshold.

Cash Transaction Limit in India - Section 269ST

The Finance Act 2017, took various measures to restrain black money and as an outcome of these measures, a new Section 269ST was inserted in the Income Tax Act. As the Section 269ST imposed restrictions on a transaction, the cash transaction limit per day is limited to Rs.2 Lakhs per day. Section 269ST states that no person shall receive an amount of Rs 2 Lakh or more (cash receipt limit):

• In aggregate from a person in a day; or
• In respect of a single transaction; or
• In respect of transactions relating to one event or occasion from a person.

However, the Central Board of Direct Taxes (CBDT) has clarified that this cash withdrawal limit does not apply for withdrawals from Banks and Post offices.

Thus the provisions of section 269ST will not apply to:

• Cash received through an Account Payee Cheque or an Account Payee Bank draft or use of electronic clearing system (ECS) through a bank account.
• Any receipt by the Government, any banking company, post office savings bank or co-operative bank.
• Transactions of nature referred to in section 269SS.
• Such other persons or class of persons or receipts, which the Central Government may, by notification Official Gazette, specify.

Withdrawal from Post Office

• Post offices under the Department of India Post facilitate drawings from Post Office savings account along with ATM facility.
• The limit of cash that can be withdrawn in a single day from a post office or ATM is Rs.25,000 and is limited to Rs.10,000 per transaction.
• The post office permits five free transactions per month including financial and non-financial transactions (balance enquiry, statement request). Beyond the free transactions, Rs.20 with GST is charged.
• Withdrawal from other bank ATMs is admissible wherein it is upto 3 free transactions in metro cities while it is five free transactions in non-metro cities. A fee of Rs.20 with GST is charged for transactions above the free transactions.

Withdrawal from Banks

The amount deposited can be withdrawn from both savings account and current account using a chequebook/withdrawal slip or using automated teller machine through a debit card. Cash withdrawal limit varies from bank to bank and also depends on the type of card being used. It varies from 10,000 to 50,000 per day based on the bank. However, the transaction details notified by the State Bank of India is furnished below.

• Withdrawals using chequebook has been restricted to 60 withdrawals per half-year by most of the banks.
• The amount of money that can be debited from the current account is limited to Rs.1,00,000 per week whereas an overall of Rs.24,000 can be drawn per week from the savings account.
• ATM withdrawals allow Rs.10,000 to be drawn per day and permits unlimited free transactions for salary account whereas 3 transactions from other ATMs with a fee of Rs.20 plus GST per month.

Cash Transaction Limit under Income Tax

The following are the main income tax sections that pertain to cash transaction limit in India:

• Section 40A(3) and Section 43 - Pertains to Cash Payment
• Section 269SS and Section 269ST - Pertains to Cash Receipts
• Section 269T - Pertains to Repayment of Certain Loans / Deposits

Section 40A(3) of Income Tax

Section 40A(3) of the Income Tax Act pertains to cash payment limit for expenditure made in cash. Under Section 40A(3), if payment for any expenditure of over Rs.10,000 is made in cash, then the expenditure will be disallowed under the Income Tax Act. Hence, it is important for all taxpayers to make any payment for the expense over Rs.10,000 through banking channels like debit card, account transfer, cheque or demand draft.

Summary: Section 40A(3) of the Income Tax Act, introduced by the Finance Act, 2008, restricts certain business transactions made in cash exceeding ₹10,000 in a day to a single person. Such payments must be made through account payee cheques, bank drafts, or electronic modes. If the payment is made in cash beyond this limit, the expenditure will be disallowed as a deduction, and in some cases, it will be treated as taxable income in subsequent years. There are specific exceptions to this rule, including payments made to government entities, banks, and certain agricultural producers. Other exemptions include salary payments to employees posted in remote locations, and payments made to agents for goods or services. Special provisions exist for transporters where the cash payment limit is raised to ₹35,000. Additionally, no transaction exceeding ₹2,00,000 is permissible in cash, and payments related to property transactions or specific occasions like marriages must be made via banks or electronic means. Exceptions are granted under specific circumstances, subject to the satisfaction of the assessing officer.

Under the Income Tax Act, to restrict certain transection in cash, section 40A(3) has been introduced by the Finance Act, 2008, with effect from 1^st April, 2009 as under:

Section 40A(3): Where the assesse 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 or through other electronic mode as may be prescribed exceed ten thousand rupees, no deduction shall be allowed in respect of such “expenditure”.

According to this section, certain transactions pertaining to business are restricted. Where assesse 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 bank or account payee bank draft or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, exceeds Rs. 10,000, the whole of such expenditure shall not be allowed as deduction.  Where any liability for any expenditure is allowed as a deduction on accrual basis in the relevant assessment year and subsequently during any previous year (hereinafter referred to as subsequent year), the assesse make payment in respect thereof, 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 or through such other electronic mode as may be prescribed, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year, if the payment or aggregate of payments made to a person in a day, exceeds Rs.10,000.  

Please remember that no disallowance shall be made and no payment shall be deemed to be the profit and gain of business, in cases and circumstances prescribed under Rule 6DD.

Where the payment is made to:

(1) the Reserve Bank of India or any banking company;

(2) the State Bank of India or any subsidiary bank;

(3) any co-operative bank or land mortgage bank;

(4) any primary agricultural credit society or any primary credit society;

(5) the Life Insurance Corporation of India established under LIC Act, 1956;

(6)  where the payment is made to the Government and, under the  rules framed by it, such payment is required to be made in legal tender;

(7)  where the payment is made for the purchase of -

• Agricultural or forest produce; or
• The produce of animal husbandry or dairy or poultry farming; or
• Fish or fish products; or
• The products of horticulture or apiculture;

To the cultivator, grower or producer of such articles produce or products.

Where the payment is made by an assesse by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the act and when such employee-

(a) is temporarily posted for a continues period of fifteen days or more in a place other than his normal place of duty or on a ship; and

(b)  does not maintain any account in any bank at such place or ship;

Where the payment was required to be made on a day on which banks were closed either on account of holiday or strike;

Where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person;

Where the payment is made by an authorized dealer or a money changer against purchase of foreign currency or travelers cheques in the normal course of his business.

Exception:

Under the following circumstances there are exception.

• When a goods are sent through transport, in payment to transporter limit of Rs. 10,000 to be considered limit of Rs. 35,000.
• This rule is not applicable to the assesse who shown their income as per Sections 44AD, 44ADA, 44AE
• If assesse proves that there is no option for him to make such payment in cash, and if assessing officer satisfy then only accepted.

This section is not applicable to Business or profession, but is applicable for construction or purchase and sale of any property.

Under any circumstances no one can accept cash of Rs. 2,00,000. It is to be accepted through bank or electronic mode. That means no transection of  more than Rs.1,99,999 is permissible, under following transections:

1. Amount accepted in a day from one person

2. Amount accepted for on transection, payment may be accepted on different days.

3. Amount accepted for any occasions like marriage etc.

Section 43 of Income Tax

Under section 43 of Income Tax Act, if payment of more than Rs.10,000 is made by a taxpayer for the acquisition of an asset by cash, the expenditure would be ignored for the purposes of determination of actual cost of the asset. Hence, it is important for all taxpayers acquiring assets to make all payments to the seller through banking channels.

Section 269SS of Income Tax

Section 269SS prohibits a taxpayer from taking/accepting loans or deposits or a sum of more than Rs.20,000 in cash. All loans and deposits of more than Rs.20,000 must always be taken through a banking channel. Section 269SS of the Income Tax Act is however not applicable when accepting/taking loan or deposit from a person or entity mentioned below:

• Government;
• Any banking company, post office saving bank or co-operative bank;
• Any corporation established by a Central, State or Provincial Act
• Any Government company as defined in clause (45) of section 2 of the Companies Act, 2013
• An institution, association or body or class of institutions, associations or bodies notified by Central Government in the official gazette.

Finally, if the person from whom the loan or deposit is taken and the person by whom the loan or deposit is accepted, are both having agricultural income and neither have any income taxable under Income Tax Act, then the provisions of Section 269SS will not apply.

Penalty under Section 269SS

Failure to comply with provisions of section 269SS could lead to a penalty equal to the amount of loan or deposit or specified sum accepted.

Section 269ST of Income Tax Act - Cash receipt limit

Section 269ST of the Income Tax Act provides that no person can receive an amount of INR 2 Lakhs or more in cash:

• In aggregate from a person in a day;
• In respect of a single transaction; or
• In respect of transactions relating to one event or occasion from a person.

Provisions of Section 269ST are not applicable when cash of more than Rs.2 lakhs is received from the following persons:

• Government;
• Any banking company, post office saving bank or co-operative bank;
• An institution, association or body or class of institutions, associations or bodies notified by Central Government in its official gazette.

Penalty under Section 269ST

As per section 271DA, in case of failure to comply with provisions of section 269ST, a penalty amount equal to the amount of receipt is payable.

Section 269T of Income Tax Act

Section 269T provides that any branch of a banking company or a co-operative society, firm or another person cannot repay any loan or deposit 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, if:

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

Provisions of section 269T are not applicable when the loan is repaid or deposit taken or accepted from below mentioned person:

1. Government;
2. Any banking company, post office saving bank or co-operative bank;
3. Any corporation established by a Central, State or Provincial Act
4. Any Government company as defined in clause (45) of section 2 of the Companies Act, 2013
5. An institution, association or body or class of institutions, associations or bodies notified by Central Government in the official gazette.

Penalty under Section 269T

As per section 271E, in case of failure to comply with provisions of section 269T, penalty amount equal to the amount of loan or deposit repaid is payable.

Cash Transaction Restrictions on Charitable Trusts under Income Tax

Thus a person donating more than Rs. 2,000 in cash on or after 01.04.2017 shall not be entitled to claim benefit of such deduction under section 80G. It is further to be noted that this limit is for donor and not for donee.

Example: If a person donates Rs. 1,000 each in cash to 5 trusts registered u/s 80G, he shall be eligible to claim deduction only for Rs. 2,000 and not for total Rs. 5,000.

If Rs. 5,000 is donated in cash to 1 trust registered u/s 80G, then no deduction shall be allowed u/s 80G.

For a charitable trust, there is no limit per donee or on aggregate basis on receipt of donation in cash. The only limit is that the aggregate anonymous donation (where records of identity of donor not available) should not exceed higher of Rs. 1,00,000 or 5% of total donations in a financial year.

The taxation of such donation in the hands of recipient charitable trust would depend on this fact even that whether donor identity is available with the trust or not.