Restrictions on Cash Transactions Under the Income Tax Act

Important Pointers about restrictions on cash transactions

For any country to develop and progress, funds are required by the ruling Government. These funds can be collected by the Government through various ways and one such way is through imposing taxes on income earned above a specified threshold limit of cash transactions. By doing so, the Government is not only able to collect the taxes but also stops tax evasions. 

Furthermore, in order to evade income tax, various persons make their transactions through cash and do not report them while filing their returns. In order to curb these practices, the government has put a limit on transactions under the Income Tax Act. Not only this, the government also imposes penalty over and above a predefined threshold limit.

Cash Transactions Restrictions

Restrictions on Cash Transactions under Income Tax Act

1. Donations Via Cash Transactions Received By Political Parties (Section 13A)

 

A political party for the purpose of Section 13A means a political party that is registered under Section 29A of the Representation of the People Act, 1951. These political parties are barred from involving in any activity of a commercial nature and thereby, earning profits. However, these parties can accept voluntary contributions made under the Representation of People Act and own ‘immovable property’ which may give them income.

Section 13A gives 100% exemption to political parties on their income from house property, income from other sources, capital gains and voluntary contributions received from any person.

The maximum amount that can be donated in cash under this section is Rs. 2000/-.

Section

Particulars

Cash Limit

Disadvantages if Cash Limit is exceeded

Section 13A

Donations received by political parties

Rs. 2000

Exemption shall not be allowed

Also Read: Deduction Under Section 80C & Its Allied Sections

2. Capital Expenditure On Specified Business  (Section 35AD)

 

Provision of Section 35AD states that the deduction is available towards any capital expenditure, wholly and exclusively, incurred for carrying on a specified business.

Notably, deduction under section 35AD is not available towards expenditure incurred for acquisition of any land or financial instrument or goodwill. Above all, to avail this deduction the person has to meet certain conditions.

The maximum amount that can be availed on payments done through cash or bearer cheque for an amount of up to Rs. 10,000 in a single day.

Section

Particulars

Cash Limit

Disadvantages if Cash Limit is exceeded

Section 35AD

Capital expenditure on specified business

Rs. 10,000

No deduction allowed

3. Insurance Premium, Health Insurance Premium (Section 36, 80D)

 

Section 36 and Section 80D covers deductions on the insurance premium and health insurance premium respectively. These deductions can be claimed only if, the premiums are bought by way of a banking transaction (cheque/demand draft/electronic transfer). Therefore, no deduction is allowed if the premiums are bought by way of cash.

Section

Particulars

Cash Limit

Disadvantages if Cash Limit is exceeded

Section 36

Section 80D

Deduction on Insurance Premium and Health Insurance Premium

Rs. 0

No deduction allowed

Also Read: 10 Ways To Save Your Taxes!

 

4. Contribution To Political Party (Section 80GGB, 80GGC)

As per Section 80GGB, any Indian company or enterprise that donates to a political party or an electoral trust registered in India can claim a deduction for the amount contributed. However, this deduction can be claimed if the payment mode of donation is cash.

Likewise, Section 80GGC also deals with deductions to political parties. But, the deduction under Section 80GGC can be availed by individuals making contributions to political party. Furthermore, this section also does not allow to claim deductions, if the contributions are made in form of cash.

Section

Particulars

Cash Limit

Disadvantages if Cash Limit is exceeded

Section 80GGB

Section 80GGC

Contribution to Political Party

Rs. 0

No deduction allowed

5. Payment For Any Expenditure (Section 40A(3))

 

Payment for any expenditure made in cash are disallowed under Section 40A(3). However, it allows the cash transaction of up to Rs. 10,000 in a single day. To sum it up, if there is any expenditure which is above Rs. 10,000/-, then that should be paid bank transfer/electronic transfer/cheque/demand draft.

Section

Particulars

Cash Limit

Disadvantages if Cash Limit is exceeded

Section 40A(3)

Payment for any expenditure

Rs. 10,000

Disallowance of expenditure

6. Payment Of Capital Expenses In Cash (Section 43(1))

 

Capital expenditures in cash are disallowed under Section 43. According to this provision, if an assessee makes a payment of any amount equal to or exceeding Rs. 10,000/- in cash to any person in a single day for any expenditure towards acquisition of any asset, then such sum is not be included in the cost of the asset. In addition to this, the assessee is not able to claim depreciation on such an amount.

To sum it up, cash transactions of only up to Rs. 10,000 in a single day are allowed for deduction on capital expenditure.

Section

Particulars

Cash Limit

Disadvantages if Cash Limit is exceeded

Section 43(1)

Payment of capital expenses in cash

Rs. 10,000

Shall be ignored for calculation of actual cost of asset.

7. Presumptive Profit (Section 44AD)

 

Under Section 44AD of Income Tax Act, small taxpayers with less than 2 crore of turnover are not required to maintain books of accounts. Additionally, their profits are presumed to be 8% of their turnover. For availing benefit under this scheme, profits where income is credited digitally or through the bank will be considered as 6% as against 8% for cash receipts.

Section

Particulars

Cash Limit

Disadvantages if Cash Limit is exceeded

Section 44AD

Presumptive Profit

For availing benefit under this scheme, profits where income is credited digitally or through the bank will be considered as 6% as against 8% for cash receipts.

Some other Restrictions On Cash Transactions

 

8. Contributions To Charitable Institutions (Section 80G)

Certain contributions made to certain relief funds and charitable institutions can be claimed as a deduction under Section 80G. Moreover, donations can be made in cash or through bank transfer. Having stated that, cash contributions above Rs. 2,000/- cannot be used to claim deduction under this section.

Section

Particulars

Cash Limit

Disadvantages if Cash Limit is exceeded

Section 80G

Contributions to Charitable Institutions

Rs. 2,000

No deduction allowed

9. Contributions towards scientific research or rural development (Section 80GGA)

The Section 80GGA allows deductions for donations made towards scientific research or rural development. This deduction is allowed to all assessees except those who have an income (or loss) from a business and/or a profession.

Donations can be made in the form of a cheque/demand draft/cash. However, cash donations in excess of Rs 10,000 are not allowed as deductions.

Section

Particulars

Cash Limit

Disadvantages if Cash Limit is exceeded

Section 80GGA

Contributions towards scientific research or rural development

Rs. 10,000

No deduction allowed

10. TDS on cash withdrawals from banks/post offices (Section 194N)
If an assessee has not filed Income Tax Return (ITR) for the last three financial years, then cash withdrawal from his/her savings or current bank account will attract TDS if the total amount withdrawn in a financial year exceeds Rs 20 lakh / Rs. 1 crore, as the case may be.

Aggregate Cash Withdrawal in a Financial Year

Particulars

TDS Rates, if ITR of

last 3 years filed

TDS Rates, if ITR of

last 3 years not filed

Up to ₹20 lacs

NIL

NIL

₹20 lacs – ₹1 crore

NIL

2%

Above ₹1 crore

2%

5%

11. Acceptance or Repayment of loan in cash (Section 269SS, 269T)
A person cannot accept loan or deposit or any other specified sum (specified sum here refers to an advance or otherwise, in relation to the transfer of any immovable property) from another person otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, if –

– Amount of loan or deposit or specified sum is Rs. 20,000 or more, or
– Sum total amount of loan, deposit, and the specified sum is Rs. 20,000 or more.

Therefore, Section 269SS puts a restriction on loan in cash above Rs. 20,000/-

Similar to Section 269SS, Section 269T prohibits any person to repay the loan or deposit or specified sum otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account, if –
– Amount of loan or deposit, including interest amount, is Rs. 20,000 or more, or
– The aggregate amount of loans or deposits, including the interest amount, held by such person in his own name, or jointly with any person, is Rs. 20,000 or more.

Therefore, under Section 269T also puts a restriction on loan in cash above Rs. 20,000/-.

Section

Particulars

Cash Limit

Disadvantages if Cash Limit is exceeded

Section 269SS

Section 269T

Acceptance/Repayment of loan in cash

Rs. 20,000

100% penalty

Also Read: TDS On Purchase Of Goods Under Section 194Q

12. Cash received for transactions (Section 269ST)
Lastly, Section 269ST prohibits any person to receive an amount of Rs.2 lakh and above in cash:
– In aggregate from a person in a day, or
– A single transaction, or
– In respect of transactions relating to one event or occasion from a person.

Therefore, the cash restriction under this section is limited to Rs. 2 lacs on transactions specified above.

Section

Particulars

Cash Limit

Disadvantages if Cash Limit is exceeded

Section 269ST

Cash received for transactions

Rs. 2,00,000

100% penalty

If you want to know more about cash payments restrictions or take TaxHelpdesk’s experts consultation, then drop a message below in the comment box or DM us on WhatsappFacebookInstagramLinkedIn and Twitter. For more updates on tax, financial and legal matters, join our group on WhatsApp and Telegram!

Disclaimer: The views are personal of the author and TaxHelpdesk shall not be held liable for any matter whatsoever!

3 thoughts on “Important Pointers about restrictions on cash transactions”

  1. Pingback: Types of Golden Rules of Accounting | TaxHelpdesk

  2. Pingback: Which Section is applicable – Section 194Q or Section 206C(1H)? | TaxHelpdesk

  3. Pingback: TDS on Cash Withdrawal From Bank in a Financial Year | TaxHelpdesk

Leave a Comment

Your email address will not be published.