Handling cash transactions has always been a common practice, but with stricter income tax regulations, even the smallest mistake can cost you a 100% penalty. The Indian Income Tax Department has intensified its efforts to track high-value cash transactions to prevent tax evasion and promote digital transactions.
So, how can you ensure compliance and avoid penalties? Let’s break it down.
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Understanding Cash Transaction Limits and Penalties
The Income Tax Act specifies strict rules on cash transactions, and violations can result in severe penalties. Below are key provisions you must be aware of:
1. Prohibition on Accepting Large Cash Transactions (Section 269SS)
- You cannot accept cash loans, deposits, or advances above ₹20,000.
- This rule applies to individuals, businesses, and companies.
- Penalty: 100% of the cash amount received illegally.
- Example: If you take a cash loan of ₹50,000 from a friend, you may have to pay a penalty of ₹50,000.
2. Cash Receipts Above ₹2 Lakh (Section 269ST)
- No individual can receive ₹2 lakh or more in cash in a single transaction.
- Includes transactions from one person in a day or for a single event.
- Penalty: 100% of the amount received.
- Example: A wedding planner receiving ₹5 lakh in cash for an event will face a penalty of ₹5 lakh.
3. Restrictions on Repaying Loans in Cash (Section 269T)
- Any loan, deposit, or advance above ₹20,000 must be repaid through digital means.
- Penalty: Equal to the cash repayment amount.
- Example: If you repay a ₹30,000 loan in cash, the penalty is ₹30,000.
4. Business Expenses Paid in Cash (Section 40A(3))
- Business expenses above ₹10,000 paid in cash cannot be deducted for tax purposes.
- For transporters, the limit is ₹35,000.
- Impact: If a company pays ₹1 lakh in rent via cash, they cannot claim this as a deduction.
5. Donations in Cash (Section 80G)
- Any donation above ₹2,000 in cash is not eligible for tax deduction.
- Example: If you donate ₹5,000 in cash to an NGO, you cannot claim a deduction on it.
6. Cash Transactions in Property Deals
- The government closely monitors real estate transactions.
- Any cash payment exceeding ₹30,000 related to property purchases or sales must be reported to the Income Tax Department.
- Example: If you buy a house and pay ₹5 lakh in cash, the tax authorities may investigate the source of funds.
7. Bank Cash Deposit and Withdrawal Limits
- Banks report cash deposits exceeding ₹10 lakh annually to the Income Tax Department.
- Frequent cash withdrawals over ₹1 crore in a year attract a 2% TDS deduction.
- Example: If a business deposits ₹15 lakh in cash, the IT department might scrutinize its sources.
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How to Avoid Penalties on Cash Transactions
1. Use Digital Payments
Always prefer NEFT, RTGS, UPI, or bank transfers for high-value transactions. Digital payments are traceable and help you stay compliant.
2. Keep Proper Records
Maintain records of receipts, invoices, and bank statements to justify transactions in case of tax scrutiny.
3. Verify Cash Limits Before Transactions
Before accepting or making a cash transaction, check if it falls under prohibited limits to avoid penalties.
4. File Transactions Properly in ITR
Declare all income and transactions correctly in Income Tax Returns (ITR) to avoid legal consequences.
5. Consult a Tax Expert
If you deal with large cash transactions, seek advice from a Chartered Accountant (CA) to ensure compliance.
(FAQs)
1. Can I withdraw more than ₹2 lakh in cash from my bank?
Yes, you can. There is no penalty on withdrawals, but frequent high withdrawals may attract Income Tax Department scrutiny.
2. What if I receive ₹2 lakh in multiple smaller transactions?
Splitting transactions to evade Section 269ST is illegal. The penalty still applies.
3. Can I make cash transactions with family members?
Yes, but if it crosses the legal limit (₹2 lakh for transactions or ₹20,000 for loans), penalties apply.
4. Are there any exemptions to these rules?
Yes, transactions involving government institutions, banks, and certain notified entities are exempt.
