When it comes to cash transactions, be it paying or accepting money, the Income Tax Laws have set certain restrictions that every countryman needs to abide by. While some of these restrictions apply to people engaged in different professions and businesses, some apply to all citizens. Not following these restrictions will lead to penalties and other consequences.

To make sure you do not have to face any penal consequences, it is essential that you understand the intricacies associated with these restrictions. So, keep scrolling to learn the limits imposed on cash transactions by the Income Tax Department.

Restrictions Imposed on Professionals and Businessmen

People engaged in any business or profession have been provided with a daily limit of Rs. 10,000 as per the Income Tax Laws. Any cash transactions to an individual for any expenditure will not be allowed beyond the set limit. If one fails to follow this restriction, the expenses paid via cash transaction will not be entitled to tax deductions. 

In the same way, if a person pays an amount more than Rs. 10,000 through cash to purchase an asset, that payment will not be allowed to combine with the asset’s total cost for availing depreciation.

However, there is an exception to this regulation, i.e., a person can pay up to Rs. 35,000 to a transporter in a day for any business or profession related purpose.

Limitations Set on Repayment and Acceptance of a Loan

According to the Income Tax Laws, there are certain provisions and a set limit beyond which a person will not be allowed to accept or repay the loan amount. Once the loan amount crosses the initial limit of Rs. 20,000, repayment or acceptance of loan cannot be made via cash. 

This initial cap of Rs. 20,000 will not be applicable for each transaction made for the loan. However, once the remaining amount of the loan exceeds the set limit combined with the payment being made, this threshold value will be applicable irrespective of the value. Although not abiding by this restriction will not affect a person’s tax liability, there are chances that the person will have to face a penalty equal to the loan amount paid or accepted.

Therefore, it is clear that no payment via cash transaction can be made once the set limit is reached. However, these restrictions do not apply to any transactions with the government, bank, corporation, government-aided company, or any other entities specified by the government. So, any transaction beyond Rs. 20,000 can be made via modes such as the electronic clearing system or account payee cheque or account payee draft.

Note: These restrictions are not applicable in the case of home loans. One can repay his home loan through cash transactions without worrying about the limit of Rs. 20,000.

Restrictions Imposed as per the Deductions Applicable on Your Income

The tax laws have some restrictions on cash payment with respect to certain transactions for which one can claim deductions on his taxable income. As per Section 80D, if the premium of health insurance is paid via cash, he will not be entitled to claim deductions. 

However, if the cash payment is made via cash for a preventive health checkup, one can claim deductions as per Section 80D. But for these cases, a sub-limit of Rs. 5,000 has been set. This restriction is also applicable for any deduction claimed for a senior citizen’s treatment charges who do not have health insurance. 

Moreover, as per section 80G, deductions claimed to make certain donations cannot be claimed if any amount goes beyond Rs. 2000 is paid via cash. However, keep in mind that this set limit is for each donation and not for all donations made.

Restrictions on Receiving Money

According to Section 269ST of the Income Tax provisions, an extensive restriction has been in function wherein one cannot accept any payment that amounts to more than Rs. 2 lakhs and above. This blanket restriction applies to the recipient and not to the payer. Moreover, this limitation is applicable for receipt of money w.r.t different purposes and not for the payments done on a single day. 

This provision was introduced to stop using black money on different occasions, such as travel, marriage, etc. For the cases under which an individual cannot claim any deductions according to the tax laws. If any person accepts payment more than Rs. 2 lakhs in a single go, the person concerned may have to face penalty charges the same as the amount received. 

Note that no penal actions will be taken to pay any amount more than the given limit. One can refer to the restriction of Rs. 10,000 if he wants to claim any expenditure for business or professional purposes.

Wrapping Up

Even though we live in a digital era, cash payments have been the most used mode of transaction, be it purchasing an asset or blessing the bride and groom on their marriage day. Therefore, it is imperative that you stay updated with the Income-tax laws’ restrictions to avoid any unpleasant experience in the future. 

Go through the provisions, take your decisions accordingly, and keep yourself free from unwanted hassles. For further information regarding the restrictions, contact FinGurus!