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In a bid to incentivise digital payments and curb circulation of black money, the Income Tax Act imposes certain restrictions from time to time on cash transactions. While some provisions apply to professionals or those engaged in business, others are relevant to all.Let’s examine 3 key restrictions on cash transactions.
Cash Restriction on Loans and Deposits
The Income Tax Act has two sections (Section 269SS and 269T) which covers restrictions on cash payment and repayment of loans and deposits.
- Section 29SS - Restriction on Cash Payments on Deposits and Loans According to this section, an individual cannot take any sum of money in way of loan, deposit or advance payments exceedings Rs 20,000 from any other individual.
- Section 269T -Restriction on Cash Repayment of loan, Deposits and Advance According to this section, repayment of a loan or advance or deposit exceeding Rs 20,000 or more to another person cannot be made through cash.
The above ceiling is not applicable if the loan is availed from or being repaid to the Government, banking institution, post office, or co-operative entity.In case of default, an individual may be levied a penalty of up to 100% of the loan or deposit amount.
Cash Restrictions to Claim Deductions
The Income Tax Act provides deductions to the tax payers in a financial year under relevant sections. However, the following deductions are not allowed if the payment is made in cash.
- Cash restrictions on deductions under Section 80D Individuals cannot avail tax deductions under section 80D for payment of health insurance premiums if it has been paid in cash, except for the amount paid against preventive health-care check-up (sub-limit of Rs 5000).
- Cash Restriction on Deductions Under Section 80G Cash donations exceeding Rs.2,000 will also not be exempted from tax under Section 80G .
Cash Restriction on Acceptance of Money
Section 269ST of the Income Tax Act prohibits the acceptance of Rs 2 lakh or more in cash. This monetary constraint is only for the recipient and not the payer.Any person violating this provision shall be liable to a pay a penalty of up to 100% of the money. The individual will be liable for penalty if;
- The cumulative cash payment received by the individual in a single day is more than Rs 2 lakh.
- The cash acceptance is part or full payment against one single invoice of Rs 2 lakh or more.
The prime objective of imposing restrictions on cash transactions is to move towards a digitised economy, ensure transparency and curtail the circulation of domestic black money, which can hurt overall productivity.Ready to make the most of your money? Start your tax planning journey now!
FAQS - FREQUENTLY ASKED QUESTIONS
How much cash transaction is allowed in a day ?
To prevent any money laundering and circulation of black money the government has levied various restrictions on cash transactions. It majorly falls into the following categories.
For businesses: As per section 40A (3), no business can spend more than Rs. 10,000 in cash in a single day. If they do so, the expenditure won’t be considered a business expenditure for the Tax calculation. This provision doesn’t apply if the payment is made or received by the Government or Banks.
For Individuals: As per section 269ST, Individuals are allowed to make a transaction of not more than Rs. 2,00,000 in a day from a single person or a single transaction relating to one event or occasion. This provision won’t apply to the government, banks, or post offices.
Apart from the above-mentioned provisions, a person is also not eligible to take or repay any loan in cash exceeding the amount of Rs. 20,000 unless it is made to the government, banks, post offices, or cooperative banks.
To claim any deduction under section 80D, individuals can’t make payments in cash.
What are the new Income Tax Rules on Cash Transactions ?
The government takes initiatives on a timely basis to control the cash circulation in the market. Thus, they have been introducing rules related to Cash Transactions on a timely basis. Following are some of the notable ones:
As per the recent Budget 2023, banks, post offices, and cooperative banks shall deduct tax at source @2% on the payment exceeding Rs. 3 crores under section 194N of the Income Tax Act 1961. Earlier, this limit was Rs. 1 Crore.
PAN and Aadhaar will be required for depositing Rs. 20 Lakh or more in a financial year. When you deposit an amount of up to Rs. 50,000 in a single day, you will only need to show your PAN card.
A fine can be imposed on cash transactions of more than Rs. 20 Lakh.
The purchases made using cash cannot exceed 2 lakhs, and PAN and Aadhaar must be provided if exceeding this limit.
Cash transactions exceeding 2 lakhs with relatives in a day are not permitted and must be processed through a bank.
Loans exceeding Rs 20,000 in cash cannot be taken from anyone.
Donations in cash exceeding Rs 2,000 are not permitted.
How much Cash Deposit is Suspicious ?
As per the latest guidelines set by the Central Board of Direct Taxes (CBDT), cash deposits exceeding Rs 20 lakh per year will now require individuals to provide their PAN and Aadhaar card details. The move comes as part of the government's efforts to clamp down on illegal and unaccounted cash transactions.
Under the new rules, individuals must provide their PAN and Aadhaar card details for cash deposits and withdrawals of large sums of money in a single year across single or multiple banks to create trackable details. Previously, individuals only needed to furnish PAN details when depositing cash above Rs 50,000 per day.
To comply with the new rules, individuals without a PAN must apply for one at least seven days before entering any transaction of over Rs 50,000 a day or over Rs 20 lakh a financial year. Failure to do so may result in a penalty of up to 100% of the amount paid or received.
To prevent the use of cash in high-value transactions, the government prohibits cash transactions above Rs 2 lakh for any reason, including accepting cash gifts of more than Rs 2 lakhson a single occasion from a single person. Additionally, cash loan and debt repayment amounts cannot exceed Rs 20,000, and property transactions with cash payments are limited to Rs 20,000.
Self-employed taxpayers must be aware that expenditure over Rs 10,000 paid in cash to a single person in a single day cannot be claimed, while a higher threshold of Rs 35,000 applies to payments made to a transporter. Finally, paying for health insurance in cash is not eligible for the Section 80D deduction and must be done through the banking system.
What are the new rules for cash deposits in the bank ?
As per the latest rules and regulations set by the Central Board of Direct Taxes (CBDT) in India, individuals who want to deposit more than ₹20 lakh in a year in their bank account are required to provide their Permanent Account Number (PAN) details and Aadhaar card. This is to make the transactions trackable and reduce the risk of financial fraud and money laundering.
Previously, individuals only had to provide PAN details when making cash deposits exceeding ₹50,000 in a day. However, under the new rules, there is no daily limit, and any large sums of money deposited in a single year across single or multiple banks must be reported with PAN and Aadhaar details.
Additionally, individuals who do not have a PAN need to apply for one at least seven days before entering any transaction above ₹50,000 a day or ₹20 lakh a financial year. The government has also set various limits on cash transactions to combat black money, including prohibiting cash transactions above ₹2 lakh for any reason and forbidding anyone from accepting cash worth more than ₹2 lakh to limit cash usage in high-value transactions.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
