What are the restrictions on cash transactions under income tax rules?

In order to check the use and circulation of black money, successive governments have been putting more and more restriction on cash transactions.

Disallowance applicable to self-employed for business expenses if paid in cash: Self-employed tax payers cannot claim any expenditure beyond Rs. 10,000/- if paid for in cash to a person on a single day. For payments made to a transporter, the law provides for a higher threshold of Rs. 35,000/-. This threshold is applicable not only for revenue expenditures but also apply for payments made for acquisition of any fixed asset failing which you will not be able to capitalise that expenditure and claim depreciation on such expenditure paid in cash.

Disallowance applicable to all the taxpayers for amounts paid in cash: The tax laws allow you certain deduction only if the same have been paid otherwise than by cash.

Firstly the deduction under Section 80 D, in respect of health insurance premium paid, is available only if it the same been paid otherwise than cash. Even for senior citizens who do not have health insurance policy and who can claim for day today medical expenses, these restrictions will apply. So even for medicine of small amount bought in cash, deduction under Section 80D will not be available. However, you can claim deduction upto Rs. 5,000/- for your family and your parents each for cash paid for preventive health check-up under Section 80 D within the maximum amount admissible under Section 80D.

For cash donations made, you can claim the deduction under Section 80G only if the amount of each donation does not exceed Rs. 2,000/-. For donations made beyond this threshold, no deduction is available if the same is made in cash.

Restrictions on acceptance and repayment of loan: Not only for payment of expenses but the tax laws also have placed restriction on acceptance and repayment of loan beyond Rs. 20,000. If you accept or repay any loan, in contravention of the law, the tax department can levy a penalty equal to the amount of loan so accepted or repaid in cash. It is worthwhile to appreciate that this threshold of Rs. 20,000/- is not considered with respect to each transaction of loan but will apply to each acceptance which will result into making the balance in the loan account exceed Rs. 20,000/ or for each repayment of any loan if the balance exceeds Rs. 20,000/- at the time of such repayment, irrespective of the amount of the individual transaction of acceptance or repayment. Your transaction with banks, government, Government Company or corporation and other entities as specified by government are however exempted from this rule. So in case you pay your home loan EMIs in cash, this punitive provision does not apply.

Restrictions on receipt of cash by any person: In order to put check on use of cash in high value transactions, the government has put a blanket ban on acceptance of cash beyond 2 lakhs by any person under Section 269ST. It is for each occasion like marriage, birthday party etc. or for each transaction like sale of gold, immovable property, holiday package, renovation/furnishing of property etc. for which this restriction will apply. It may happen that the payer does not claim tax deduction for it but the restriction on recipient will still apply.

Unlike business expenditure, here the restriction is all pervasive for the whole transaction as a whole and not necessarily for payment made in a single day. For example, a caterer cannot accept two lakhs or more in aggregate for marriage reception form a single payer, whether on a single day or spread over several days. Law, generally, does not have any restrictions for payment of cash for transaction of purchase/sale of jewellery or immovable property etc. but if the value of a single transaction exceeds two lakhs, then seller is prohibited from accepting any cash beyond two lakhs for such transactions. Even one cannot accept gift in cash beyond two lakhs on one occasion from a single donor. Those who accept cash beyond two lakhs, in contravention of this provision, can be subjected to a penalty equal to cash received. It is interesting to note that the payer does not have responsibility under these provisions.