Provisions related to cash transactions under Income Tax

Prabhat Nigam

08 Mar, 2022

Demonetization is not the only step that government took to regularize cash transactions taking place in India. Apart from demonetization, some other steps were also taken by the government by adding certain provisions related to cash transactions under Income Tax of India, 1961 and in other laws too. This piece of writing focuses on certain provisions of Income Tax Act, 1961 which regulate and discourage cash transactions taking place.

What are the provisions related to cash transactions under Income Tax?

• Section 40A(3): The limit of cash transactions made to a person or aggregate of payments in a single day can be done at a maximum of Rupees 10,000. There is an exception created for transporters where the threshold limit has been increased slightly to 35,000. If a payment needs to be made in excess of the threshold provided, then it can be done by Account Payee cheque or Account Payee demand draft or through electronic mode. If the cash transaction is above 10,000 limit, then such transactions cannot be allowed.
• Section 40A(2): In case the payment is  made to a specified person for example relative of an individual, Director of a company. If the Assessing Officer considers such payment to be excessive and unreasonable then he may disallow it altogether.
• Section 269ST: A person is not allowed to receive an amount in excess of Rupees 2,00,000 from a person except from a bank or government in a day, in a single transaction, except by an account payee cheque or account payee demand draft or through electronic means. Non-compliance of the provision will attract a penalty of equal amount of such receipt.
• Section 43(1): If cash has been given to any person for acquisition of any asset in a single day and such cash transaction exceeds the limit of Rupess 10,000, then the person cannot take depreciation for acquisition of such asset if the cash transaction goes beyond Rupees 10,000.
• Section 80D(2B): If a person makes payment for health insurance premium in cash then such amount is not allowed as deduction.
• Section 80G(5D): If a donation has been made in cash in excess of Rupees 2000, then the same cannot be allowed as deduction from Gross Total Income.
• Section 80GGA(2A): If any money is donated for scientific research or rural development (section 80GGA) in excess of Rupees 10,000 via cash transactions, then the same cash transactions under income tax are not allowed as deductions.
• Section (80GGB and 80GGC): If any donations are made to the political parties through cash, then the same cash transactions under income tax are not allowed as deductions.
• Section 194N: TDS is deducted at the rate of 2% if the sum is withdrawn from the bank in the form of cash by a person in a particular Financial year exceeds Rupees 20 lakhs in case ITR has not been filed in all of the three previous Assessment Years or Rupees 1 crore if income tax return has been filed for all or any one of the three previous Assessment Years.
•  Section 269SS: No person can accept any loan or deposit in the form of cash exceeding Rupees 20,000 except by way of account payee cheque or account payee demand draft or though electronic mode. Violation of this provision will invite a penalty under section 271D of the Income Tax Act 1961, which will be equivalent to the amount so received.
•  Section 269T: This provision prohibits any person to repay loan in the form of cash and instead repay it through the mode of an account payee cheque or account payee demand draft or through electronic mode through a bank if  the amount of loan or deposit including the interest amount exceeds Rupees 20,000 or when the aggregate amount of loans or deposits including the interest amount held by his own name or jointly with any other person and the amount exceeds Rupees 20,000.

In case this provision is found to be violated, then an equivalent sum of money shall be levied as penalty under section 271E of the Income Tax Act.

•  Savings account and Current account:

1. In case of savings account, the cooperative bank or a bank needs to report to the CBDT^[1] if the cash deposits aggregating to Rupees 10 lakh or more are deposited during a financial year.
2. In case of a cash deposit in FD, if the aggregate amount deposited exceeds the amount of Rupees 10 lakh during a financial year, then the same needs to be reported by the bank to CBDT.
3. In case of a current account, a limit of Rupees 50 lakh has been set and if the amount exceeds, then there is a high possibility that the account holder may face a notice from IT Department.

•  Cash withdrawal limit from bank and post office: Rupees 20,000 has been set as the withdrawal limit for every customer at a Post Office. A deposit more than Rupees 50,000 cannot be accepted by the Branch Postmaster.
•  Credit card bill payments: The bank is supposed to report to the IT department any instance of payment of more than Rupees 1 lakh in cash for clearing credit card dues and also any instance where any person pays more than Rupees 10 lakh to clear credit card dues in a financial year.
•  TCS provisions on transaction involving cash: TCS shall be deducted on the following cash transactions:

1. Where any kind of services is provided whose value is above Rupees 2 lakh.
2. Where sale of bullion or jewellery takes place worth more than rupees 2 lakh and 5 lakh respectively
3. Where sale of motorcycle takes place for more than Rupees 10 lakh

Conclusion

From the above discussion it can be concluded that the government wants to discourage people from making cash transactions under income tax especially when the amount is big in number. A closer look of the above mentioned sections tells that government wants to be informed about any big transaction taking place. These measures inserted in the Income Tax and other laws are meant to coax the people to make less of unaccounted cash transactions and adopt formal accounted route where the government can keep a check on large size transactions taking place through it.