Income Tax Rules: What are the restrictions on cash transactions?

Income tax rules are made by the government for the public to pay tax and follow rules. These rules do restricts the cash transactions for beyond the limit of Rs. 2 lacs for any reason. But this limit has been relaxed if the payment is to be done in hospital bills for treatment of COVID from the time period between April 1st to May 30th. But for most transactions this rule is applicable.

In our country, most people are taxpayers, But some penalties can be imposed on them if they are unaware of the restriction on cash transactions. These restrictions on cash transactions will be understood later in the article but before moving forward on this concept we should know about Income tax.

Restrictions on Cash Transactions under the Income Tax Act

What is Income Tax

Income tax is a tax that you pay to the government directly based on your Income. According to law, taxpayers must pay the income tax return annually to determine their tax obligations. These Income-tax are the source of revenue for the government through which they fund public services and provide goods for citizens.

The government levies tax on the citizens of the country to produce income. This income enhances the country’s economy and raises the standard of living of the country as well as its people.

Types of Tax

There are mainly two types of Taxes Direct taxes and Indirect Taxes. The taxes which you pay directly like income tax, Corporate tax, and wealth tax whereas indirect taxes are those taxes that you pay indirectly like sales tax, service tax, value-added tax, etc. Income Tax Restrictions According to Income tax rules in India, you are not allowed cash transactions for any purpose above the limit of Rupees 2 lacs. For example, if you are purchasing gold jewelry for Rupees 3 lacs through a one-time payment, then it is necessary to make the payments through cheque, debit card, credit card, or bank transfer.

Other than restrictions imposed on expenses, tax laws also impose restrictions on acceptance and repayment of loans beyond the sum of Rs. 20,000.

1. Restriction on Cash Transaction on Business Expenditure

  • There are some rules applied to companies, industries, and firms by the Income-tax department. These companies and firms are also not allowed to make transactions beyond a certain limit. Suppose the business owner makes the transaction of more than rupees 10,000 per day through cash payment then this amount is not claimed to be an expenditure.
  • Businessmen and self-employed Taxpayers cannot make any transaction above Rupees 10,000 per day.
  • If the businessman or a self-employed person makes the payments to the transporter, the Income-tax law provides the limit of rupees 35,000 per day without disallowance. This rule is also applicable for the payments made for the acquisition of the fixed asset.

2. Restriction of Cash Transaction on Individuals and other Persons

Apart from the restriction Imposes on business houses, the Income-tax department also imposes some restrictions on Individuals and other people living in India, or we can say these are restrictions imposed on the general public. These restrictions are explained as follows:

3. Restrictions on loan acceptance or repayment amount

There are certain restrictions imposed by the government on the acceptance and repayment of the loan. Under the provision of Indian tax laws, the person is not allowed to accept or repay the loan up to the limit of Rupees 20,000 initially. Repayment of even a single Rupee cannot be made in cash if the loan account is more than Rupees 20,000 at the repayment time. The transactions of the loan can be made in cash until the balance in the loan account does not exceed the sum of Rs. 20,000.

These loan restrictions are not applicable for bank transactions, government companies, and other corporations which come under the government department.

A home loan does not come under these restrictions. You can pay your home loan in cash beyond Rs. 2000.

4. Restrictions on Deductions from your Income

There are certain payments for which you can claim a deduction from your income. The deductions made under section 80D are not admissible if the health insurance installment is made in cash. For payments for a health check, there is a limit of Rs 5000 under Section 80D. These restrictions are also applied for the medical expenses of a senior citizen who is not having health insurance.

In the same way, donations deductions that come under Section 80D can’t be made if the donation is made for more than Rs 2000 in cash. This restriction applies to each donation and not for the donation in aggregate.

5. Restrictions on accepting money more than Rs. 2 Lacs

The Indian Tax laws have one more restriction which comes under Section 269ST. A blanket restriction is imposed on the receipt of money by anyone for an amount of Rs. 2 lacs and above. This type of restriction applies only to the recipient and not to the payer. This restriction is imposed in receiving money for each transaction and not for an aggregate of payment every single day.

Black Money: This rule is brought to restrict the use of black money on various events like marriage, big shot parties, etc. For this, there is no deduction for taxpayers under tax laws. For instance, a catering person cannot accept more than the sum of Rs. 2 Lacs or more for a marriage function on a single day or even over a period. In the same way, there is no restriction on receiving payment for selling a house or any other property but in case the single transactions of more than Rs. 2 Lacs, the seller cannot receive more than Rs. 2 lacs in these transactions.

In the same way, you are not allowed to receive any gift beyond Rs. 2 lacs even if they are not treated as your income, like the gifts you received on your marriage, etc. Otherwise, an income tax officer can levy a penalty on you equal to the cash received. The payer is not responsible for any consequences.

The information above can help you save yourself from falling under the trap of unpermitted cash transactions and penalties.

Frequently Asked Questions

Q1. What are the income tax restrictions applicable to a person?
Ans. The income-tax restrictions applicable to a person are:

  1. Restrictions on accepting or repaying loans.
  2. restriction on the certain deductions from income
  3. Blanket restrictions on accepting money more than Rs.2 lacs.

Q2. What is the initial limit to which the person can accept or repay a loan?
Ans. The initial limit for accepting or repaying of loan is Rs. 20,000.

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