The rapid shift to a digital economy in India means that heavy cash transactions can now come with a heavy cost. If you still rely on large cash payments, you could face significant tax penalties and lose out on valuable deductions.
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Key Penalties for High-Value Cash Transactions
The Income Tax Act includes strict rules to curb large cash movements. Breaking these rules can result in penalties that equal the entire transaction amount.
- Accepting Cash of ₹2 Lakh or More: You are not allowed to accept cash of ₹2 lakh or more from a single person, whether in one transaction or for a single event. The penalty for this violation is 100% of the amount received. This rule is covered under Section 269ST.
- Cash Loans, Deposits, or Advances: You cannot accept a cash loan, deposit, or advance of ₹20,000 or more. Even borrowing a modest amount like ₹25,000 from a friend in cash violates this rule. The penalty for doing so is 100% of the amount accepted (under Section 269SS).
- Repaying Loans in Cash: The same ₹20,000 limit applies to the repayment of loans, deposits, or advances. You cannot repay ₹20,000 or more in cash, whether to an individual or a financial institution. The penalty is equal to the amount repaid (under Section 269T).
How Cash Payments Can Cost You Deductions
Even when a cash payment doesn’t incur a direct penalty, it can still raise your tax bill by making you ineligible for tax deductions.
- Business Expenses (Section 40A(3)): If you are a business owner, you cannot claim a deduction for business expenses paid in cash that exceed ₹10,000 to a single person in a day. For transporters, this limit is ₹35,000. Failing to follow this rule means the expense will be added back to your taxable income, increasing your tax liability.
- Donations (Section 80G): Cash donations above ₹2,000 are not eligible for a tax deduction. To claim this benefit, you must make the donation digitally or via cheque.
- Health Insurance Premiums (Section 80D): To claim a deduction on health insurance premiums, you must pay them digitally. The only exception is for preventive health check-ups, where a cash payment of up to ₹5,000 is allowed.
Large Cash Withdrawals Are Also Tracked
Banks are required to levy a TDS (Tax Deducted at Source) on large cash withdrawals, which serves as another measure to track and regulate cash flow. Under Section 194N:
- A 2% TDS is levied if your total cash withdrawals from a bank exceed ₹1 crore in a financial year.
- The TDS rate jumps to 5% if you have not filed an Income Tax Return for three consecutive years and your cash withdrawals exceed ₹20 lakh.
The bottom line is simple: in an era of convenient digital payments, using cash for significant transactions can bring more trouble than convenience. Staying within the prescribed limits—or better yet, going cashless—isn’t just about compliance; it’s about avoiding unnecessary and preventable tax hits.
