Restriction On Cash Transactions Under The Income Tax Act
For any country to develop and progress, funds are required by the ruling Government. These funds can be collected by the Government through various ways and one such way is through imposing taxes on income earned above a specified threshold limit on its people. By doing so, the Government is not only able to collect the taxes but also stops tax evasions In order to evade the income tax, various persons make their transactions through cash and do not report them while filing their returns.
In order to curb these practices, the government has put a limit on the cash transactions under the Income Tax Act along with a penalty for transacting in cash over and above a predefined threshold limit.
Restrictions On Cash Transactions Under Income Tax Act
1. Donations received by Political Parties (Section 13A)
Political party for the purpose of Section 13A means a political party which is registered under Section 29A of the Representation of the People Act, 1951. These political parties are barred from involving in any activity of a commercial nature and thereby earning profits. However, these parties can accept voluntary contributions made under the Representation of People Act and own ‘immovable property’ which may give them income.
Section 13A gives 100% exemption to political parties on its income from house property, income from other sources, capital gains and voluntary contributions received from any person.
The maximum amount that can be donated in cash under this section is Rs. 2000/-.
2. Capital expenditure on specified business (Section 35AD)
As per provisions of section 35AD, the deduction is available towards any capital expenditure, wholly and exclusively, incurred for carrying on a specified business.
Notably, deduction under section 35AD is not available towards expenditure incurred for acquisition of any land or financial instrument or goodwill. Further, to avail this deduction the person has to meet certain conditions.
The maximum amount that can be availed on payments done through cash or bearer cheque for an amount of up to Rs. 10,000 in a single day.
3. Capital expenditure on specified business (Section 35AD)
As per provisions of section 35AD, the deduction is available towards any capital expenditure, wholly and exclusively, incurred for carrying on a specified business.
Notably, deduction under section 35AD is not available towards expenditure incurred for acquisition of any land or financial instrument or goodwill. Further, to avail this deduction the person has to meet certain conditions.
The maximum amount that can be availed on payments done through cash or bearer cheque for an amount of up to Rs. 10,000 in a single day.
Also Read: 10 Ways To Save Your Taxes!
4. Contribution to Political Party (Section 80GGB, 80GGC)
As per Section 80GGB of the Income Tax Act, 1961, any Indian company or enterprise that donates to a political party or an electoral trust registered in India can claim a deduction for the amount contributed. However, this deduction can be claimed if the payment mode of donation is cash.
Similar to Section 80GGB, Section 80GGC also deals with deductions to political parties. But the deduction under Section 80GGC can be availed by individuals making contribution to political party. This section also does not allow to claim deductions, if the contributions have been made in form of cash.
5. Payment for any expenditure (Section 40A(3))
Section 40A(3) disallows the expenses made in cash. However, it allows the cash transaction of up to Rs. 10,000 in a single day. Therefore, if there is any expenditure which is above Rs. 10,000/-, then that should be paid bank transfer/electronic transfer/cheque/demand draft.
6. Payment of capital expenses in cash (Section 43(1))
Section 43 disallows the capital expenditures in cash. According to this provision, if an assessee makes a payment of any amount equal to or exceeding Rs. 10,000/- in cash to any person in a single day for any expenditure towards acquisition of any asset, then such sum shall not be included in the cost of the asset, and the assessee will not be able to claim depreciation on such amount.
Therefore, cash transaction of only up to Rs. 10,000 in a single day is allowed for deduction on capital expenditure.
7. Presumptive Profit (Section 44AD)
Under Section 44AD of Income Tax Ac, small taxpayers with less than 2 crore of turnover are not required to maintain books of accounts and their profits are presumed to be 8% of their turnover. For availing benefit under this scheme, profits where income is credited digitally or through the bank will be considered as 6% as against 8% for cash receipts.
8. Presumptive Profit (Section 44AD)
Under Section 44AD of Income Tax Ac, small taxpayers with less than 2 crore of turnover are not required to maintain books of accounts and their profits are presumed to be 8% of their turnover. For availing benefit under this scheme, profits where income is credited digitally or through the bank will be considered as 6% as against 8% for cash receipts.
9. Contributions towards scientific research or rural development (Section 80GGA)
Section 80GGA allows deductions for donations made towards scientific research or rural development. This deduction is allowed to all assessees except those who have an income (or loss) from a business and/or a profession.
Donations can be made in the form of a cheque/demand draft/cash; however cash donations in excess of Rs 10,000 are not allowed as deductions.
10. TDS on cash withdrawals from banks/post offices (Section 194N)
As per Section 194N, if an assessee has not filed Income Tax Return (ITR) for the last three financial years, then cash withdrawal from his/her savings or current bank account will attract TDS if the total amount withdrawn in a financial year exceeds Rs 20 lakh / Rs. 1 crore, as the case may be.
11. Acceptance or Repayment of loan in cash (Section 269SS, 269T)
As per the provisions of Section 269SS, a person cannot accept loan or deposit or any other specified sum (specified sum here refers to an advance or otherwise, in relation to the transfer of any immovable property) from another person otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account, if –
– Amount of loan or deposit or specified sum is Rs. 20,000 or more, or
– Sum total amount of loan, deposit, and the specified sum is Rs. 20,000 or more.
Therefore, Section 269SS puts a restriction on loan in cash above Rs. 20,000/-
Similar to Section 269SS, Section 269T prohibits any person to repay the loan or deposit or specified sum otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account, if –
– Amount of loan or deposit, including interest amount, is Rs. 20,000 or more, or
– The aggregate amount of loans or deposits, including the interest amount, held by such person in his own name, or jointly with any person, is Rs. 20,000 or more.
Therefore, under Section 269T also puts a restriction on loan in cash above Rs. 20,000/-.
12. Cash received for transactions (Section 269ST)
Section 269ST prohibits any person to receive an amount of Rs.2 lakh and above in cash:
– In aggregate from a person in a day, or
– In a single transaction, or
– In respect of transactions relating to one event or occasion from a person.
Therefore, the cash restriction under this section is limited to Rs. 2 lacs on transactions specified above.
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