Allowable Cash Transactions under Income Tax

The Indian economy is gradually transitioning to digitization, and the popularity of online payments has surged in recent years. Additionally, the government is implementing penalties, disallowances, and restrictions on cash payments that exceed specific thresholds in order to reduce the circulation of black money.

This document covers

What is a Cash Transaction?
Health Insurance Premium — Section 80D
Donations — Section 80G
Political Party Donations — 80GGC
Extended Limits for Presumptive Taxation u/s 44AD and 44ADA
Payments of Business Expenses in excess of Rs 10,000
Accepting or Repaying Loans and Deposits
Payments of Income tax, TDS and GST

1. What is a Cash Transaction?

A transaction in which cash is exchanged for a product or service, either in the form of currency notes or coins.

This means payment made using credit card, debit card, net banking, IMPS, UPI, NEFT, RTGS, BHIM and Aadhaar pay are not considered as "Cash Transaction".

As of November 2024, cryptocurrency is not acknowledged as legal tender in India. Additionally, there may be a limited number of vendors who accept cryptocurrency as payment for goods or services.

The income tax department has not provided any clarification regarding this matter. According to the Income Tax Act, payments must be made in a form other than cash to qualify for deduction or expense claims.

While below are some of the restrictions and disallowances on Cash Payments w.r.t Income Tax, as a general guideline, one should exercise caution while making cash payments over Rs. 10,000 to a single individual or entity.

2. Payments of Health Insurance Premium — Section 80D

Taxpayer can claim the deduction of Health Insurance premium paid u/s 80D. However, if the premium is paid in cash, he cannot claim any tax deduction u/s 80D.

Refer Health Insurance Tax Deduction Calculator and Tax Deductions on Health Insurance

3. Donations — Section 80G

Generally, the taxpayers claim the deductions for the donations made u/s 80G. However, if the donation is made in cash in excess of Rs 2000, he cannot claim any deductions u/s 80G.

Refer Donations u/s 80G — Explained

4. Political Party Donations — 80GGC

There are high chances of circulation of black money in donating to political parties. Hence the CBDT has restricted cash donations to political parties. The taxpayers can claim the tax benefit of 100% deduction only if the donation is made through "other than cash" mode.

The taxpayer who has given donation in cash cannot claim any deductions.

5. Extended Limits for Presumptive Taxation u/s 44AD and 44ADA

The taxpayers who wants to opt for 44AD and 44ADA can enjoy the higher threshold if he is dealing in Digital modes. The threshold for the taxpayers to opt for 44AD is 2 Crores and 44ADA is 50 lakhs if he is dealing more than 5% of receipts and payments in Cash.

Refer Guide on Presumptive Income Tax Scheme

6. Payments of Business Expenses in excess of Rs 10,000

Generally business have day to day expenditure and some times the taxpayers makes the payments in cash. As per Section 40A (3) ,payment or aggregate of payments in excess of Rs 10,000 in cash is not allowed as deduction.
Prescribed modes of payment to claim expenditure in Income Tax Returns: The prescribed modes of payments of expenses are credit card, debit card, net banking, IMPS, UPI, NEFT, RTGS, BHIM and Aadhaar pay.
If the taxpayer makes the payment in excess of Rs 10,000 in cash, this will be considered as the income of subsequent year if the same expenditure has been allowed as deduction in previous year

NOTE: The limit of Rs 10,000 is increased to Rs 35,000 if it is payment made to transport operator for plying, hiring or leasing goods carriages.

EXCEPTIONS:

The above limit of Rs 10,000 / Rs 35,000 is not applicable in case of following payments in cash

If the payment is made to RBI/SBI/any banking company/Co- Operative bank/Land Mortgage bank/ primary agricultural credit society or any primary credit society /LIC
If the payment is made to Government
If the payment is made to the cultivator, grower or producer for the purchase of
- Agricultural or forest produce
- The produce of animal husbandry (including livestock, meat, hides and skins)
- Dairy or poultry farming
- Fish or fish products
- The products of horticulture or apiculture
If the payment is made to the producer for the purchase of products manufactured or processed without the aid of power in a cottage industry.
If the payment is made to a person in a village or town where the banking facilities are not available.
If the payment is made to an employee in connection with retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such amount payable to the employee or his heir does not exceed Rs 50,000
If any amount is paid towards Salary after deducting TDS if such employee is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship and does not maintain any bank account at such place.
If the payment is made to an agent who is required to make the payment in cash for goods or services on behalf of such person
If the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travelers cheques in the normal course of his business.

7. Accepting or Repaying Loans and Deposits

Section 269SS: An Individual cannot receive a loan or deposit of Rs 20,000 or more in Cash in a single day from another person
Section 269T: An individual cannot repay a loan or deposit of Rs 20,000 or more in Cash in a single to another person