Cash transactions of Rs 2 lakh plus per day could incur a penalty: Experts

This applies even to transactions with close relatives; penalty can be up to 100% of amount received

In a recent case, the Income-Tax Appellate Tribunal (ITAT), Delhi bench, held that cash gifts from brother and sister can’t be treated as ‘unexplained’ by the assessing officer, especially if they were given for a medical emergency. The case, however, once again highlights the need for taxpayers to know the rules and limits that govern cash transactions. 

Loans and their repayment 

Sections 269SS and 269T deal with cash payments and repayment of loans and deposits. Maneet Pal Singh, partner, I.P. Pasricha & Co says, “A person can’t accept a loan, deposit, or any other specified sum from another person except via an account payee cheque, account payee bank draft, an electronic clearing system through a bank account, or other specified manner, if the amount is Rs 20,000 or more.” 

This limit is for a single day. However, there are some exceptions to this rule. For instance, it doesn’t apply in the case of emergency help taken from family members; if partners pool in cash capital in a partnership firm; or if an individual who earns only agricultural income accepts a deposit or loan from another. It also doesn’t apply if a person accepts a loan, deposit, or a specified sum from the government, a bank, or a financial institution.

Deepak Jain, chief executive, TaxManager.in says, “Adhere to the provisions of Section 269SS, otherwise you may have to pay a penalty of 100 per cent of the loan or deposit amount.” 

Under special circumstances, if the taxpayer is able to provide a legitimate reason for the cash transaction to the assessing officer, he could avoid paying the penalty.

Payment of insurance premium

According to Section 80D, a person can claim a deduction on health insurance premium, and expenses incurred towards preventive health check-ups for self, spouse, dependent children, and parents. Singh says, “You can’t claim a deduction under Section 80D if the health insurance premium is paid in cash.” 

Deduction can be availed if health insurance premium is paid by credit card and other online modes. Jain adds, “Deduction can be availed if payment for a preventive health check-up is made in cash.”

High-value transactions 

The Finance Act 2017 introduced Section 269ST in the Income-Tax Act, 1961 to eliminate high-value cash transactions that may result in black money creation and tax evasion. 

Suresh Surana, founder, RSM India, says, “This section also aims to promote the digital economy and create a disincentive against the cash economy.” 

According to Section 269ST, no person can receive an amount of Rs 2 lakh or more in aggregate from a person in a day in a single transaction; or, in multiple transactions relating to one event or occasion from a person. An amount above Rs 2 lakh must be received via an account payee cheque, account payee bank draft, or an electronic clearing system (ECS) via a bank account.

Surana adds, “However, this restriction doesn’t apply to the government, any banking company, post office savings bank, or a co-operative bank.” 

Section 269ST also doesn’t apply in situations such as withdrawing cash from a bank’s banking correspondent, white label ATM, etc. Surana adds, “Penal provisions have also been provided under Section 271DA. It provides that if a person receives any amount in contravention to the provisions of Section 269ST, he shall be liable to pay a penalty of a sum equal to the amount received.”

Singh says, “Hence, an individual can’t, in a single day, accept more than Rs 2 lakh in cash, even from close relatives.”

Rules for the self-employed 

According to Section 40A (3), a self-employed person can’t claim a business expense if payment for it was made in cash for an amount above Rs 10,000 to a single person on a single day. Jain says, “The threshold increases to Rs 35,000 in the case of a transporter.”

Singh adds, “This threshold applies not only to revenue expenditure but also to payments made for the acquisition of a fixed asset. If you fail to observe this rule, you will not be able to capitalise that expenditure and claim depreciation on it.”

Rules of property transactions in cash

• Sections 269SS and 269T apply to acceptance or repayment of advance for transfer of immovable property
• You can’t pay an amount exceeding Rs 20,000 in cash in such a transaction
• If you fail to comply, the penalty could be a sum equal to the amount of the loan, deposit, or specified sum so repaid or accepted 
• Since many immovable property transactions include cash, experts recommend the consideration be routed through specified modes and not by cash or cheque