High penalties for cash transactions: Know I-T dept's key restrictions

The Income Tax Department has recently released a brochure emphasising the importance of avoiding cash transactions to mitigate tax penalties. This initiative aims to educate taxpayers about the potential financial repercussions of cash dealings, which can lead to severe penalties under the Income Tax Act.

 

“Say No To Cash Transactions. Individuals prefer to receive, pay, and transfer cash when the amounts of transactional value (money) involved are marginal to small,” the Income Tax Department in a brochure released on January 2, 2025 said.

 

The brochure advises taxpayers to refrain from using cash for daily transactions, particularly those involving significant amounts. The department noted that many individuals often resort to cash payments for convenience, but this practice can lead to unintentional violations of tax regulations.

 

 

Key highlights from the brochure

 

Transaction limits are defined based on the nature of the transaction and the parties involved. The Income Tax Department has provided detailed guidelines in their brochure, specifying these limits to ensure compliance and promote transparency.

 

Individuals often prefer to handle transactions involving marginal to small amounts of money through cash payments, transfers, and receipts. This preference stems from several factors:

 

a) Societal factors: The prevalence of large agricultural, informal, and non-formal sectors within the socio-economic framework compels individuals to rely on bartering and cash-based transactions.

 

b) Individual factors: These include:

 

Limited access to digital banking and money transfer facilities;

 

Considerations related to cost and available resources;

 

Psychological hesitations regarding digital financial transactions, often influenced by concerns about security, confidentiality, and related issues; and

 

The existence of domains, networks, and channels—sometimes operating on a global scale—designed to:

 

Facilitate unaccounted incomes and enable evasion of taxes and duties;

 

Obscure and protect activities related to crimes and offences funded through unrecorded financial means.

 

To address this, the Income-tax Act, 1961, includes provisions that regulate and optimise cash transactions. These provisions are frequently updated to align with evolving contemporary requirements.

 

If caught violating these provisions, a penalty equivalent to the amount paid in cash will be imposed, in addition to any other applicable penalties.

 

Key provisions and associated penalties:

 

Section 269SS: Restrictions on cash loans and deposits

 

Mandate: Prohibits acceptance of loans, deposits, or specified sums in cash exceeding Rs 20,000.

 

Penalty: Violations result in a penalty equal to the amount accepted in cash, imposed on the recipient.

 

Section 269ST: Limit on cash receipts

 

Mandate: Bars receipt of Rs 2 lakh or more in cash from a single person in a day, or in respect of a single transaction or related transactions.

 

Penalty: Non-compliance leads to a penalty equivalent to the amount received in cash.

 

Section 269T: Restrictions on cash repayments

 

Mandate: Prohibits repayment of loans or deposits in cash if the amount, including interest, is Rs 20,000 or more.

 

Penalty: Breaches attract a penalty equal to the amount repaid in cash.

 

Disallowance of deductions for cash payments:

 

Section 40A(3): Expenditures exceeding Rs 10,000 (Rs 35,000 for payments to transporters) made in cash are not deductible under business income calculations.

 

Section 80G: Deductions for donations exceeding Rs 2,000 are disallowed if made in cash.

 

Exceptions:

 

Certain transactions are exempt from these restrictions, including:

 

Transactions with government entities, banking companies, post office savings banks, or cooperative banks.

 

Both payer and payee having only agricultural income and no taxable income.