India’s journey toward becoming a digital-first economy accelerated after demonetization. The government has consistently emphasized the reduction of cash usage in high-value transactions to bring more transparency, efficiency, and accountability into the financial system. While cash remains widely used across different sectors, the Income-tax Act, 1961, contains a series of restrictions, disallowances, and penalties designed to discourage excessive cash payments. These restrictions apply across health insurance, business expenditure, asset acquisition, and other financial dealings.
We focus on some of the key cash transaction limits applicable to individuals and businesses in India, with a detailed look at provisions that govern health insurance, single-day payments, acquisition of assets, and specified businesses.
Health Insurance and Cash Payments
Health insurance plays a critical role in providing financial security against unforeseen medical expenses, hospital bills, and rising healthcare costs. The government incentivizes the purchase of health insurance policies through various tax deductions. However, to discourage unaccounted cash transactions, specific restrictions apply when it comes to paying premiums.
Section 80D and Cash Premiums
Section 80D of the Income-tax Act allows deductions for medical insurance premiums paid by individuals and Hindu Undivided Families. The deduction is available for premiums paid for self, spouse, dependent children, and parents. However, this benefit is strictly available only when the payments are made through banking channels such as cheque, debit card, credit card, net banking, or digital wallets.
If the premium is paid in cash, the deduction under Section 80D is not allowed. The only exception relates to preventive health checkups, where cash payments up to ₹5,000 are permitted as part of the overall deduction limit. This restriction is designed to ensure that transactions remain traceable and verifiable.
For example, if Mr. Arjun pays ₹20,000 as health insurance premium for his parents through internet banking and spends ₹3,000 in cash on a preventive health checkup, the total deduction available would be ₹23,000. However, if he pays the insurance premium in cash, no deduction will be available, and only ₹3,000 can be claimed for the preventive checkup.
Section 36(1)(ib) for Businesses
Businesses and professionals often provide health insurance coverage for employees. Section 36(1)(ib) allows such expenses as deductible business expenditure. However, similar to Section 80D, this deduction is not allowed if the premium is paid in cash. Employers must use banking channels to ensure the expense qualifies for tax deduction.
Life Insurance Premiums
Unlike health insurance, life insurance premiums fall under Section 80C. Deductions under this section are available even if the premium is paid in cash, provided the taxpayer has opted out of the default tax regime. This distinction highlights the government’s approach of targeting specific areas where cash transactions are more common and could potentially contribute to unrecorded financial activity.
Payments to a Single Person in a Day
One of the most important provisions to control cash usage in business transactions is Section 40A(3). This section disallows deductions for expenses paid in cash above a specified threshold, thereby encouraging businesses to adopt digital and banking modes of payment.
Section 40A(3) Restrictions
According to Section 40A(3), any payment exceeding ₹10,000 made in cash to a single person in a single day is not allowed as a deductible expense. This means that while the expense may still be valid for business purposes, it will not be considered while calculating taxable income. The intention behind this provision is to prevent the circulation of unrecorded money and ensure transparency in business payments.
For example, if a trader purchases raw materials worth ₹50,000 and pays the supplier in cash on the same day, the entire expense will be disallowed for tax purposes. However, if the same payment is made through cheque or online transfer, the deduction is permitted.
Exceptions Under Rule 6DD
There are certain exceptions to this restriction provided under Rule 6DD of the Income-tax Rules. These include payments made to banking institutions, government bodies, book adjustments, and certain unavoidable circumstances such as areas without proper banking facilities.
Special Provisions for Transporters and Employees
The cash payment limit is slightly higher for specific cases. Payments to transporters for hiring or leasing goods vehicles are allowed up to ₹35,000 per day in cash. Similarly, employers can pay up to ₹50,000 in cash to employees as terminal benefits, such as retirement or resignation settlements.
These relaxations recognize the practical challenges faced in certain industries but continue to uphold the principle of reducing high-value cash dealings.
Acquisition of Assets and Impact on Depreciation
Acquiring assets is an important part of business expansion and capital investment. The Income-tax Act also imposes restrictions on cash payments made during asset acquisition to prevent the inclusion of unaccounted money into business books.
Section 43(1) and Actual Cost of Assets
Section 43(1) defines the actual cost of an asset for tax purposes, which is then used to calculate depreciation and other benefits. If cash payments exceeding ₹10,000 are made to a single person in one day towards acquiring an asset, such payments are ignored while computing the actual cost of the asset.
This means that the portion of the asset cost paid in cash above the specified limit will not qualify for depreciation.
For example, suppose Mr. Yash purchases a car for business purposes at a cost of ₹2,00,000. If he pays ₹20,000 in cash on one day and the remaining amount through online transfer, the actual cost considered for depreciation will be only ₹1,80,000. The ₹20,000 cash payment will be ignored.
This provision discourages taxpayers from inflating depreciation claims by using untraceable cash payments and promotes the use of digital payment channels.
Specified Businesses and Cash Expenditure
To promote investment in critical sectors, the government provides special deductions for certain specified businesses under Section 35AD. These include businesses engaged in developing and operating cold chain facilities, setting up warehousing facilities for agricultural produce, building hospitals, and developing infrastructure such as hotels and housing projects.
Deduction Under Section 35AD
Section 35AD allows businesses to claim a 100 percent deduction of capital expenditure incurred for such specified activities in the year of expenditure itself, rather than claiming depreciation over the life of the asset. This acts as an incentive for businesses to invest in long-term infrastructure projects that benefit the economy.
Cash Restriction in Section 35AD
The benefit under Section 35AD is not available if payments exceeding ₹10,000 are made in cash to a single person in a single day. This restriction ensures that significant capital expenditure for infrastructure projects is routed through proper banking channels.
For instance, if a company invests ₹50 lakhs in building a cold storage facility and makes a cash payment of ₹1 lakh to a contractor in a single day, the entire cash portion will be disallowed from deduction. The company will only be able to claim the deduction on the remaining expenditure made through permissible modes.
Why These Restrictions Are Important
The restrictions on cash transactions serve multiple purposes. Firstly, they act as a deterrent against the generation of black money. High-value cash transactions often escape regulatory scrutiny, leading to tax evasion. Secondly, these provisions help create a digital footprint for transactions, making them easier to verify during audits and assessments. Thirdly, they support the government’s larger push toward a digital economy, where transparency and accountability are easier to maintain.
Businesses and individuals who ignore these rules not only lose valuable tax deductions but also expose themselves to penalties and legal complications. Therefore, understanding and complying with these limits is crucial for maintaining financial discipline.
Loans and Deposits under Section 269SS
Loans and deposits are common financial arrangements in both personal and business contexts. While they facilitate liquidity and support investment, cash-based transactions in this area are highly prone to misuse. To prevent unaccounted money from being circulated as loans or deposits, the Income-tax Act sets out clear rules.
Prohibition on Cash Loans
Section 269SS prohibits any person from accepting loans or deposits of ₹20,000 or more in cash. This restriction applies to individuals, Hindu Undivided Families, companies, and firms. The law insists that such transactions must be routed through banking channels like account payee cheques, drafts, or electronic transfers.
For example, if Mr. Ramesh lends ₹25,000 in cash to his friend Mr. Suresh, this transaction would violate Section 269SS. Instead, the loan must be disbursed through a proper bank transfer.
Penalty under Section 271D
Violating Section 269SS attracts severe penalties. Section 271D provides that the penalty is equal to the amount of the loan or deposit accepted in cash. In the example above, Mr. Suresh would face a penalty of ₹25,000 for accepting the loan in cash.
This provision acts as a strong deterrent and pushes lenders and borrowers to rely on formal financial systems. It also helps the authorities track money movements, thereby preventing the circulation of undisclosed income.
Exceptions to Section 269SS
There are certain exceptions provided to ensure that genuine transactions are not penalized unnecessarily. These include transactions between family members in some cases, dealings with government entities, banking companies, or cooperative societies. The courts have also recognized genuine hardship situations where a strict penalty may not be justified. However, the general principle remains clear: loans and deposits beyond ₹20,000 must not be handled in cash.
Repayment of Loans and Deposits under Section 269T
Just as accepting cash loans is restricted, repayment of loans and deposits also has to be compliant with the law. Section 269T regulates how repayments are made.
Restriction on Cash Repayments
Section 269T prohibits repayment of loans or deposits in cash if the repayment amount, along with interest, exceeds ₹20,000. Repayment must also be made through account payee cheque, bank draft, or electronic transfer.
For example, if a borrower repays ₹50,000 in cash against a loan, such repayment is not valid under Section 269T. Instead, the borrower must use banking channels to ensure compliance.
Penalty under Section 271E
Non-compliance with Section 269T invites a penalty under Section 271E. The penalty is equal to the amount repaid in violation of the provision. Continuing with the above example, the borrower could face a penalty of ₹50,000 for repaying the loan in cash.
Reporting under Form 3CD
Both acceptance and repayment of loans in cash are subject to reporting during tax audits. Businesses covered under tax audit requirements must disclose these transactions in Form 3CD, making it easier for the authorities to detect violations.
Donations to Political Parties
Political donations represent another area where cash transactions used to dominate. However, to improve transparency in political funding and to reduce the influence of unaccounted money, the Income-tax Act introduced restrictions on cash donations to political entities.
Sections 80GGB and 80GGC
Donations made to registered political parties or electoral trusts are eligible for a 100 percent tax deduction under Sections 80GGB and 80GGC. This applies to both individuals and companies, provided the donation is made through banking channels.
However, cash donations are not eligible for any tax deduction. This means if an individual donates ₹1 lakh to a political party in cash, they cannot claim any deduction for this amount. But if the same donation is made through cheque, draft, or digital transfer, the full deduction is available.
Impact on Political Transparency
By restricting tax benefits to non-cash contributions, the government aims to ensure that political funding remains accountable and traceable. This provision discourages anonymous cash contributions, which were often used to channel unaccounted wealth into political activities.
Presumptive Income Scheme under Section 44AD
Small businesses and professionals often face difficulties in maintaining complex books of accounts. To simplify compliance and reduce the burden of accounting, the government introduced presumptive taxation schemes. Section 44AD is one such provision that allows eligible taxpayers to declare income on a presumptive basis, without maintaining detailed records.
Eligibility and Scope
Section 44AD is available to resident individuals, Hindu Undivided Families, and partnership firms (excluding LLPs). It applies to businesses with turnover below the prescribed limit. Under this scheme, taxpayers can declare income at a fixed percentage of turnover, generally 8 percent for cash receipts and 6 percent for digital receipts.
Enhanced Limit of ₹3 Crores
Until recently, the presumptive scheme was available only for businesses with turnover up to ₹2 crores. From assessment year 2024–25, the limit has been extended to ₹3 crores, provided that cash receipts do not exceed 5 percent of total turnover.
For example, if a small trader records a turnover of ₹2.8 crores and receives less than ₹14 lakhs in cash (which is 5 percent of turnover), he can opt for presumptive taxation. This expanded limit provides significant relief for small businesses that are primarily digital in their transactions.
Treatment of Non-account Payee Cheques
It is important to note that non-account payee cheques or drafts are treated as cash receipts for the purpose of calculating the 5 percent limit. This means that only account payee instruments and digital transfers are considered non-cash receipts.
Restrictions on Large Cash Receipts under Section 269ST
Apart from specific areas like loans, deposits, and donations, the law also imposes a general restriction on high-value cash receipts under Section 269ST.
Prohibition under Section 269ST
No person can receive ₹2 lakhs or more in cash under the following circumstances:
- From a single person in a day
- In respect of a single transaction
- In respect of transactions relating to one event or occasion
This wide-ranging restriction ensures that large financial transactions are not carried out in cash, regardless of the nature of the transaction.
Practical Examples
- If a jeweler sells gold worth ₹3 lakhs and receives ₹2.3 lakhs in cash and the rest digitally, the cash portion violates Section 269ST.
- If a wedding planner receives payments of ₹1 lakh each from a client on the same day, totaling ₹2 lakhs, this also breaches the restriction.
- Even if payments are split across multiple days but pertain to one single transaction, the restriction applies.
Penalty under Section 271DA
The penalty for violating Section 269ST is equal to the cash amount received. If someone receives ₹2.5 lakhs in cash, the penalty will also be ₹2.5 lakhs. This provision is among the strictest in the Income-tax Act and serves as a major deterrent against large cash transactions.
Practical Implications for Taxpayers
The cash transaction limits under Sections 269SS, 269T, 269ST, 80GGB, 80GGC, and 44AD collectively create a framework that discourages the use of cash in significant financial dealings. Individuals, businesses, and political parties must carefully ensure compliance to avoid penalties and disallowances.
For taxpayers, the implications are clear: reliance on digital payments not only ensures compliance but also unlocks tax benefits such as deductions and presumptive taxation options. On the other hand, non-compliance results in heavy penalties that can exceed the value of the original transaction.
Cash Transactions in Everyday Business
For small traders, wholesalers, and service providers, cash remains a convenient medium of exchange. However, the restrictions under Sections 40A(3), 43(1), 35AD, 269SS, 269T, and 269ST directly affect how transactions are recorded and how expenses or investments are treated for tax purposes.
Daily Purchases and Payments to Suppliers
Consider a grocery shop owner who buys supplies worth ₹50,000 from a wholesaler. If this payment is made in cash, the portion above ₹10,000 cannot be claimed as a deductible expense under Section 40A(3). This reduces the tax-deductible expenses, increasing the taxable income of the shop owner.
For transporters, the permissible cash limit is higher at ₹35,000 per day. A transporter who receives ₹30,000 in cash for carrying goods would not violate the provision. But if the amount received crosses this threshold, the deduction is disallowed.
Impact on Small-Scale Manufacturers
Small manufacturers who purchase raw materials in bulk often face situations where suppliers insist on cash. If they pay more than ₹10,000 in cash in one day to a single supplier, those expenses are disallowed, even if the payment was genuine. This forces businesses to rely heavily on banking channels, even when liquidity constraints push them toward cash.
Cash Use in Acquisition of Assets
The law also links cash dealings with the cost of assets. Section 43(1) clearly disallows any part of an asset’s cost that is paid in cash above ₹10,000 from being included in the asset’s value.
Example of Machinery Purchase
Suppose a textile manufacturer buys machinery worth ₹5 lakhs and pays ₹40,000 in cash, with the balance by electronic transfer. The ₹40,000 will not form part of the actual cost for depreciation purposes. Over the years, this not only reduces the depreciation claim but also inflates the taxable income.
Businesses Claiming Capital Expenditure
In certain specified businesses under Section 35AD, such as setting up cold storage facilities, the entire capital expenditure can be deducted. However, any cash expenditure above ₹10,000 is disqualified. This can lead to substantial disallowances if businesses are not vigilant in following the rules.
Political Funding and Social Trust
Restrictions on cash donations to political parties have significant social and economic implications. Political funding historically attracted large volumes of unaccounted money. By mandating that only digital or banking channel donations are eligible for tax deductions, the government has created a trail for funds entering political systems.
Transparency in Donations
Registered political parties must now maintain transparent records of funds received. This ensures that individuals or companies donating through cheques or digital modes can claim deductions, but anonymous cash donations lose their tax advantage.
Electoral Trusts and Donor Confidence
Electoral trusts act as intermediaries that collect contributions and distribute them to political parties. Since only traceable, non-cash donations are deductible, donors are reassured that their contributions are legitimate and tax-efficient. This has gradually shifted political funding patterns toward more transparency.
The Presumptive Taxation Advantage
Small taxpayers often find relief in presumptive schemes. By extending the turnover limit to ₹3 crores under Section 44AD for those with less than 5 percent cash receipts, the government rewards businesses that embrace digital transactions.
Example of Presumptive Scheme Use
A retail store with a turnover of ₹2.5 crores has cash sales of ₹10 lakhs. Since this is within the 5 percent limit, the owner can opt for presumptive taxation. Instead of maintaining detailed accounts, the owner declares income at 6 percent of digital receipts and 8 percent of cash receipts. This reduces compliance burdens while ensuring tax is paid on reasonable profits.
Professional Adaptation
Although Section 44AD applies to businesses, professionals can avail similar benefits under Section 44ADA. Doctors, architects, and consultants who keep their cash receipts below the prescribed threshold can also simplify compliance. This fosters a digital-first mindset among professionals who previously relied heavily on cash dealings.
Large Cash Receipts and Event-Based Transactions
Section 269ST creates a broad net against large-scale cash transactions, applicable across different scenarios.
Single Transaction Breach
If a jeweler sells ornaments worth ₹3 lakhs and accepts ₹2.2 lakhs in cash, it directly violates the provision. Even if the balance is received through banking channels, the cash component itself triggers a penalty.
Multiple Payments on the Same Day
Suppose a wedding caterer receives three payments of ₹80,000 each from a client on the same day. Even though no single payment exceeds ₹2 lakhs, the aggregate from one person in a single day crosses the threshold, inviting a penalty.
Event-Based Receipts
In the context of social or business events, payments linked to one occasion are considered collectively. If a decorator receives ₹2.1 lakhs in cash for a wedding, spread over different dates, it still breaches the limit since the payments relate to a single event.
Common Mistakes by Taxpayers
Despite clear restrictions, many individuals and businesses inadvertently breach these provisions due to lack of awareness or inadequate record-keeping.
Cash Deposits and Withdrawals
A common misconception is that depositing or withdrawing cash from one’s own bank account is restricted. These transactions are not prohibited, but issues arise when cash is exchanged between unrelated parties beyond prescribed limits.
Ignoring Aggregation Rules
Many taxpayers assume that splitting payments into smaller amounts can avoid restrictions. However, the law aggregates transactions on a per-day or per-occasion basis, which nullifies such practices.
Non-Account Payee Instruments
Another frequent mistake is using non-account payee cheques or drafts, assuming they are different from cash. The law treats these instruments as cash for the purpose of calculating limits, which often results in unintended violations.
Judicial Interpretations
Several court rulings and tribunal decisions have clarified the scope of cash transaction restrictions.
Genuine Hardship Considerations
In certain cases, where taxpayers could prove that cash payments were made due to genuine difficulties such as lack of banking facilities in remote areas, penalties were waived. Courts have recognized that the intent of the law is to curb misuse rather than penalize genuine hardships.
Emphasis on Substance Over Form
Judicial bodies have stressed that transactions must be examined for their substance. For instance, if payments are structured to technically comply with the law but still conceal unaccounted income, authorities may disregard the form and apply penalties.
Compliance Challenges for Small Businesses
While digital payments have grown rapidly, many small businesses in rural and semi-urban areas still face difficulties in complying with strict cash transaction rules.
Infrastructure Limitations
Limited access to reliable internet, insufficient penetration of digital banking, and reluctance of customers to use electronic methods pose challenges. This creates friction between legal compliance and practical realities.
Liquidity Constraints
Cash often serves as immediate liquidity, especially for daily-wage payments or urgent purchases. Businesses that are forced to rely only on digital channels sometimes struggle with cash flow management.
Risk of Penalties
Since penalties under provisions like Section 269ST and 271DA are equal to the amount received in cash, small errors can lead to disproportionate consequences. This makes compliance stressful for small taxpayers.
Broader Economic Implications
The restrictions on cash transactions are not just about tax enforcement; they influence the broader economy in multiple ways.
Promoting Digital India
By linking tax benefits with digital compliance, the government encourages individuals and businesses to adopt digital payments. This aligns with broader goals of creating a cash-light economy.
Reducing Black Money Circulation
Large volumes of unaccounted income were historically circulated in cash. By placing strict restrictions and heavy penalties, the government has reduced the avenues for black money transactions.
Financial Inclusion and Transparency
As more businesses move towards digital systems, financial data becomes traceable. This helps in better credit assessments by banks, improved access to formal finance, and increased inclusivity in the economic system.
Conclusion
The evolution of India’s financial system in recent years reflects a decisive shift from cash dependence to transparent, traceable, and digital modes of payment. The various restrictions under the Income-tax Act, 1961, covering health insurance premiums, daily business expenses, asset acquisition, specified businesses, loans and deposits, political donations, presumptive taxation, and large cash receipts, collectively aim to curb unaccounted money while promoting greater accountability in financial dealings.
For individuals, this means being mindful of the manner in which payments are made, as genuine expenses or contributions may lose their tax benefit if settled in cash beyond prescribed limits. For businesses, particularly small traders and professionals, the emphasis is on integrating banking and digital systems into everyday operations. While this creates compliance challenges in regions where digital penetration is still developing, the long-term advantages include simplified tax structures, better access to formal credit, and stronger financial credibility.
On a broader scale, the restrictions contribute to building a fairer economy by limiting avenues for tax evasion and strengthening transparency in political and commercial transactions. The presumptive income schemes reward those who reduce their reliance on cash, creating an incentive-based pathway to digitalization. Similarly, penalties on large cash receipts or high-value payments discourage practices that previously allowed unreported wealth to circulate unchecked.
The transition is not without hurdles, but it represents a fundamental rebalancing of India’s financial culture. By aligning personal, business, and institutional practices with these regulations, taxpayers not only protect themselves from penalties and disallowances but also participate in the larger national movement toward efficiency, inclusivity, and equitable economic growth. The consistent message across all provisions is clear: responsible financial conduct in compliance with prescribed limits is no longer optional but essential for sustaining long-term stability in the Indian economy.