Cash Payments under Income Tax Act
The Income Tax Act, 1961, promotes digital and transparent financial transactions. Therefore, cash payments beyond certain limits attract disallowance under specific provisions. These rules ensure accountability and prevent tax evasion by regulating large cash dealings.
📌 Section 40A(3) – Disallowance of Cash Expenditure
1. Rule: If an assessee incurs any expenditure for which a payment (or aggregate of payments) exceeds ₹10,000 in a day to a single person otherwise than by account payee cheque, bank draft, or electronic modes, then such expenditure is disallowed.
2. Limit for Transporters: The limit is ₹35,000 per day if the payment is made for plying, hiring, or leasing goods carriages.
📌 Section 40A(3A) – Payment in Subsequent Years
If an expense is initially allowed on an accrual basis and paid later in cash exceeding the above limit (₹10,000 or ₹35,000 for transporters), then it will be deemed income in the year of payment.
📌 Section 35AD – Capital Expenditure for Specified Businesses
Capital expenditure incurred in cash exceeding ₹10,000 is not allowed as a deduction for specified businesses under this section.
❌ What Happens If You Exceed the Limit?
🚫 Disallowance of Expense
1. Entire expenditure will be disallowed while computing income under “Profits and Gains from Business or Profession”.
2. This increases the taxable income and therefore the tax liability.
🚫 Deemed Income under Section 40A(3A)
Payment in cash exceeding the limit for a previously booked expense → treated as business income in the year of actual cash payment.
✅ Exceptions Where Cash Payments Are Allowed
As per Rule 6DD of the Income Tax Rules, certain payments are exempted from disallowance even if made in cash exceeding ₹10,000. Key exceptions include:
1. Payment to government bodies.
2. Payment to a banking or cooperative institution.
3. Payments made in villages or areas without banking facilities.
4. Payments made on bank holidays or during bank strikes.
5. Payment to hospital, railways, agricultural producers, etc.
Summary Table: Cash Expenditure Limits
