Government of India is leaving no stone unturned to reduce the cash transactions in the economy by putting restrictions on use of cash in certain type of transactions or capping the maximum amount of cash that can be used. We will discuss the provisions of the Income Tax Act 1961 which discusses about cash transactions and the consequences of breaching such provisions.
Restrictions on the Use of Cash:
Payment of expenses in cash by Businesses:
Any person doing business in India is not allowed to pay for any expenditure in cash exceeding Rs.10,000 to one person in a day. In other words any business entity cannot pay more than Rs.10,000 to one person in one day. But in the case of payments made for plying, hiring or leasing goods carriages, the limit of payment in cash is Rs.35,000, beyond which cash cannot be paid to one person in a day.
Consequences: What if you paid cash more than Rs.10,000 to a person in a day?
If you paid more than Rs.10,000 in cash, then no deduction shall be allowed as an expense, which means that indirectly you are liable to pay tax on that expense.
Exceptions: There are exceptions to certain types of payments which are allowed even if you paid more than Rs.10,000 in cash. The same are discussed below:
where the payment is made to the cultivator, grower or producer of such articles, produce or products; for the purchase of:
agricultural or forest produce; or
the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or
fish or fish products; or
the products of horticulture or agriculture,
where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products;
where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town;
where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike;
Purchase of assets in cash by Business:
Any person doing business cannot pay more than Rs.10,000 in cash for any asset purchased from a person in a day. Its similar to the provisions related to payment in cash for expenses.
Consequences: The asset will not form part of the fixed assets of the business and accordingly you cannot claim the depreciation on it.
Cash Receipts in Certain Transactions:
No person (including non-business) is allowed to receive any amount beyond Rs.20,000 in cash for the following purposes from one person:
Consideration for sale of immovable property
Here there is no such provision of “a day”, which means that you cannot accept cash for these transactions more than Rs.20,000 in total and not in a day.
Consequences: If you failed to comply with this provision and received cash more than Rs.20,000 from a person , then a penalty of 100% of the amount received shall be imposed.
Repayment of Loans, Deposits or Advances in Cash:
No person is allowed to repay any amount beyond Rs.20,000 in cash to a person for the following purposes:
Advances received for sale of immovable property.
This applies to both business as well as non-business persons.
Consequences: If you failed to comply with this provision and repaid cash more than Rs.20,000 to a person , then a penalty of 100% of the amount paid shall be imposed.
General Cash Receipts:
No person can receive cash more than Rs.2 lacs from a person in a day for any kind of transaction. This includes general purchase of car by a non-business assets.
Consequences: If you failed to comply with this provision and received cash more than Rs.2 lacs from a person in a day , then a penalty of 100% of the amount received shall be imposed.
No person can donate more than Rs.2,000 in cash to a registered trust or political party
Consequences: Deduction for donation will not be allowed from income.
Reporting of Cash Transactions:
Income tax act mandates the reporting of certain transactions which need to be reported by Banks and other business entities in their annual filings related to cash. The same are discussed below:
Cash Deposits and withdrawals:
If you have deposited or withdrawn cash from your bank account beyond a certain limit, then banks are required to report to the income tax department against your PAN on their records. The reporting limits are mentioned below:
All these limits are for a financial year, if the aggregate value of the above specified nature of transactions exceeds these specified limits in a financial year then only it will be reported by banks.
Cash Paid for Purchases or Services:
If you have paid more than Rs.2 lacs in cash for any purchase or for any service in a financial year to a business entity, then the recipient business entity will report the transaction with the income tax department in their annual filings.
TDS on cash withdrawals:
Recently government has also introduced the provisions of withholding of tax for cash withdrawals in Finance Act 2019. If you withdraws more than Rs.1 crore from the bank in a financial year, then banks are required to deduct TDS @ 2% from the payment.
Thinking of doing a cash transaction, make sure you are compliant with the above mentioned provisions and are well within the limits.