Be Aware of Cash Transactions: Limits & Penalties under Income Tax Act

December 18, 2018

Cash dealings have played a major role in our economy since ages. But it has been one of the major causes of generation of black money. Indian Government has taken several steps to curb cash transactions. It’s stated objective being to work towards a near cashless economy.

In such a cashless economy, transaction is not with real cash or money. It is through use of virtual or plastic money such as credit card or e-wallets. Cashless transaction would help the government to better track instances of tax avoidance. Besides, there is a clear trail for every rupee moving through the economic system. This in turn would help to reduce the generation of black money.

Steps taken by the government to boost cashless transactions is as follows: a) Licenses given to payment banks. b) E-commerce promotion by liberalizing FDI norms. c) Reduction in surcharge amounts on card and digital payments, etc.

To promote the economy through non-cash transactions, Govt. has also introduced different mediums such as banking cards, USSD, AEPS, UPI, mobile wallets, banks prepaid cards, point of sale, internet banking, mobile banking, micro ATM’s, etc.

For limiting the number and amount of cash dealings, Income Tax (IT) department has laid down certain rules under various sections of the Income Tax Act.

Cash limits and penalties under various Sections of Income Tax Act:

There is now a limit on cash transaction for expenses relating to a person’s business or profession under the IT Act. Any payment over Rs.10,000 made in cash in a single day as expense, is not considered as expenditure.

For instance, if an individual makes a payment of Rs 10,000 in a day, he can claim it as an expense in his IT returns. But if he makes cash payment for more than Rs 10,000 in a day for any expense, then that amount is not allowed as deduction. But if he is not claiming this transaction as an expense then said IT section will not apply.

In short, a tax payer’s cash transaction is now restricted to Rs 10,000 per day. For amounts more than Rs.10,000 he should pay through banking channels only.

Another section under the IT Act now forbids buying fixed assets in cash above Rs 10,000. For instance, if an individual acquires any fixed asset by paying in cash of more than Rs 10,000 it will not be treated as fixed assets in the books of accounts. For any such purchase of fixed asset in cash, the depreciation benefit will not be available to him. In such cases, it is in the taxpayer’s interest to make payment to the seller through banking channels only.

There is a section under the IT Act that pertains to limit on cash receipts. It restricts accepting or repaying any loan or deposit or advance of more than Rs 19,999 in cash by an individual during a financial year.

This means an individual cannot receive cash of more than Rs.19,999 as loan or deposit or advance from any person. If a taxpayer does so he will be liable to a penalty. The penalty amount would be equal to the cash loan/deposit/ advance he had accepted. The said IT section provisions will not apply in a case, where both the persons, i.e. the one who gives the loan or deposit and the other who accepts the loan or deposit have only agricultural income and both of them do not have any income chargeable under the IT Act.

In case of immovable property too, the same criterion applies. An individual can buy immovable property in cash up to Rs 19,999. Beyond this amount he will face penalty. Thus, it is best to carry all dealings in such amounts above Rs 19,999 through banking channels only.

Then there is a section under IT Act that imposes certain limits on cash transactions per day. Under this section, maximum amount in cash an individual can receive from another person in a day is Rs 1,99,999. The said IT Act stipulates that no person will receive a sum of Rs 2,00,000 or more:

• From one person in total in a day or
• For a single transaction or
• For transaction related to one principle transaction

The limit on receiving cash of Rs 2,00,000 or above applies even if cash dealing is for personal or business purpose. Even if it is capital or revenue in nature, tax-free or taxable income, the said rule still applies.

But, cash transaction limit of Rs 1,99,999 will not apply in cases where:

• Cash comes through an account payee cheque or an account payee bank draft or through an electronic clearing system through a bank account.
• The cash dealing is by the Govt., any banking company, post office savings bank or co-operative bank.
• It is a transaction of the nature referred to in Section 269SS.
• It consists of people or class of people or receipts that the govt. at the Centre notifies via Official Gazette.

Under Income Tax Act, if a person receives cash of Rs 2,00,000 or above in a day, he will have to pay a hefty penalty. The rate of penalty will be a sum equal to the amount of cash received. Suppose an individual receives Rs 5,00,000 from a single person for a transaction then the former will be liable for penalty of Rs 5,00,000, which is a whopping 100% fine. The individual who pays the money is not liable for penalty; it is the receiver of cash who has to bear the brunt. But, if the individual gives a valid reason for such breach of law, the law allows withdrawal of penalty.

There is one section under IT Act under which no cash donation exceeding Rs 2,000 is permissible. If you donate more than Rs 2,000 in cash to a registered trust or a political party it will be a violation of the latest tax laws.

For claiming deductions under specific IT section, you can make cash donations up to Rs 2,000 only. For any amount above that, make the contribution through cheque or draft to claim tax benefit.

For tracking high value cash transactions and curbing black money, the Indian Govt. has laid down certain guidelines. Banks and non-banking financial bodies have to send an AIR (Annual Information Report) to the IT Dept. This report must contain details of all high-value transactions by its clients. On the basis of this statement, tax authorities collect information on certain transactions.

In the following cases service providers must send an AIR recorded by them in a Financial Year to the IT department:

1. Cash payments made to buy bank drafts or pay orders or banker’s cheque aggregating to Rs 10,00,000 or more.
2. Cash deposit of more than Rs 10,00,000 into one or more bank accounts of an individual, other than a current account and fixed deposit.
3. Fixed deposits of an individual, apart from renewals, aggregating to Rs 10,00,000 or more .
4. Cash payments of Rs 1,00,000 or more for settling credit card bills. Also same amount used in case of settling of credit card dues via cheque or wire transfer mode.
5. Investment in mutual fund exceeding Rs 2,00,000.
6. Investment in company or institution, for more than Rs 1,00,000 for buying its bonds and debentures.
7. Cash payment made exceeding Rs 1,00,000 for buying shares of a registered company.
8. Buying or selling immovable property of Rs 30,00,000 or more. Sub Registrar has to generate an AIR.
9. Cash investment of Rs 1,00,000 or more in prepaid instruments issued by RBI.
10. Cash deposit/withdrawal in a current account aggregating to Rs 50,00,000 or more.

In case of cash transaction of Rs 50,000 and above, it is mandatory to give PAN card copy to the bank. This rule applies to all kinds of banking transactions. For e.g. cash deposit or cash withdrawal, cheque transactions, for net banking etc, where the amount is Rs 50,000 or more.

In case of the following transactions made by a person, giving PAN details is compulsory:

• Buying of pay orders/bank drafts of Rs 50,000 or more in a day.
• Opening account with any of the Indian banks.
• Using prepaid payment instruments. For e.g. using gift cards, social benefit cards or remittance cards for cash transactions of more than Rs 50,000 per year.
• Opening of Demat account for buying/selling of shares, for amount more than Rs 1,00,000.
• Buying of bonds or mutual funds where the sale value exceeds Rs 50,000.
• Applying for debit or credit card at any bank or financial institution.
• Deposits in a bank or co-operative society, post office or non-banking financial institution.
• Buying or selling of a four-wheeler (not necessary for two-wheeler).
• Payment of life insurance premium of Rs 50,000 or more per year.
• Payment of hotel bills or foreign travel bills or buying of foreign currency above Rs 50,000.
• Buying of gold jewellery or bullion worth Rs 2,00,000 or more in cash or by credit card.
• Buying of immovable property worth more than Rs 10,00,000.

The above initiatives taken by the Govt. aims at curbing the menace of black money and any other form of unaccounted money. The purpose of this detailed article is to update readers of the various income tax rules in place. It is in your interest now to be cautious while making or receiving cash payments. Breaching these rules will invite hefty penalty, warns the IT Dept. It is in your own interest to be careful while doing cash transactions hereafter. Wherever possible, make payments by electronic means or cheque only.

As the Income Tax Department wisely says “Go Cashless. Go Clean.”

Disclaimer: As a professional one has endeavoured to compile a comprehensive list of suggestions on the subject matter of cashless economy. But this is by no means an exhaustive list of the ways and means of doing business dealings in cash. Besides, there could be various other issues and circumstances involved in taking a decision. It is advisable to check for more information wherever possible, on the said matter.

By Nitin J Shetty
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Comment on this article

  • Charles, Mangalore

    Sat, Jan 05 2019

    Superb article nice one nithin cleared a lot of doubts

  • Imtiaz Ahmed, Mangalore

    Fri, Dec 21 2018

    Such rules have complicated normal life.

  • Ronald D, Udupi

    Thu, Dec 20 2018

    With such rules it is not possible to lead a normal life or to survive.

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Title: Be Aware of Cash Transactions: Limits & Penalties under Income Tax Act

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