Explained Cash is still king in India but how much are you actually allowed to pay in cash?

NEW DELHI: Even though the pandemic has accelerated the adoption of digital payments in India multi-fold in the last two years, cash is still king in India with currency under circulation touching an all time high of Rs 3,09,827 crore on March 4, 2022. Point to note: Rs 17.97 lakh crore worth of currency notes were in circulation prior to demonetisation in 2016, which has now crossed Rs 30 lakh crore.
According to a 2019 report by the RBI, cash accounts for nearly 50% of all transactions in India, adding that the number went further north up to 70% for transactions below Rs 500.So, what is the permissible limit for cash transactions in our country where the majority of the payments are made in cash?
Since, cash transactions have always played a key role in Indian economy and have also been a reason for the accumulation of black money, the government has put various restrictions on cash transactions, one of the restriction is provided u/s 269ST by which a person is restricted to accept cash of Rs. 2 lakhs or more by any person during a financial year subject to certain exemption to specified persons. This restriction applies for each activity like sale of car, house, gold, marriage, birthday party, etc.
Section 269ST of the Income Tax Law imposes a Rs 2 lakh restriction on cash transactions per day, which means that no person can receive an amount of Rs 2 Lakh or more:
•In aggregate from a person in a day; or
•In respect of a single transaction; or
•In respect of transactions relating to one event or occasion from a person.
This provision does not apply to:
•Cash received through an Account Payee Cheque or an Account Payee Bank draft or use of electronic clearing system (ECS) through a bank account.
•Any receipt by the Government, any banking company, post office savings bank or co-operative bank.
•Transactions of nature referred to in section 269SS.
• Such other persons or class of persons or receipts, which the Central Government may, by notification Official Gazette, specify.
What about an event like marriage or a party?
"This Rs 2 lakh restriction applies for occasions like marriage, birthday party etc. or for transactions such as sale of gold, immovable property, holiday package, renovation/furnishing of property etc.. There may be a possibility that the payer does not claim tax deduction for such transactions but the restriction on recipient will still apply. This restriction is applicable for transactions as a whole and not necessarily for payment made in a single day. For instance, during marriages, a caterer cannot accept more than the limit in aggregate for a marriage from a single payer irrespective of the fact that such a transaction has been done on a single day or over several days. In general, law does not have any restrictions for cash payment for transactions made for immovable property or say jewellery but if a single cash transaction exceeds the specified limit, then the seller is prohibited from accepting any cash beyond the limit for such cash transactions," explains Sandeep Bajaj, Managing Partner, PSL Advocates and Solicitors.
What if I want to purchase a fridge and an AC in cash?
" If a person purchases an electronic item from a vendor, the purchaser is permissible to make payment in cash up to a limit of Rs 2 lakh only. He can make the payment in one day or multiple times over a period to the vendor, but the aggregate payment that he can make in cash to the vendor for a specific transaction is limited to Rs 2 lakh. Income tax Rule does not prescribe any specific documents to be collected, where the cash transactions is within the permissible limit," said Anita Basrur-Partner, Direct Tax - Sudit K. Parekh & Co. LLP.
What about receiving cash as a marriage gift?
The bride and groom cannot receive any gifts beyond Rs 2 Lakh in cash even if such gifts are received from parents or immediate family. In case they receive payments in contravention of the above provisions, the income tax department can levy a penalty equal to the amount of money accepted in cash.
"It is worth noting that though there are no restrictions on receiving payment in cash for sale of anything like jewellery, property, etc., however, if the value of a single transaction is more than Rs 2 lakh, then in such cases the seller cannot receive more than Rs.2 Lakh either in full or in part for such transactions," said Sandeep Bajaj, Managing Partner, PSL Advocates & Solicitors.
Is there a penalty?
It is interesting to note that the payer does not have any responsibility under these provisions. "For example, a banquet hall cannot accept Rs 2 lakh or more in aggregate for marriage reception from a single payer neither on a single day nor spread over several days. However, law does not provide any restriction on payment of cash to payer," said Maneet Pal Singh.
Take another instance: Sameer buys a ring for his wife worth Rs 2.5 lakh and pays the jeweller in 5 equal installments on a single day. Since the jeweller has accepted Rs 2.5 lakhs in cash, Section 269ST is applicable and he will have to pay a penalty of Rs 2.5 lakh.
Now, Neha had a surgery and her hospital bill came to Rs 4 lakh. She paid the bill in installments on 4 different dates, but since the hospital has received cash above 2 lakh in total with regard to a single transaction/bill, the hospital will have to pay the penalty.
So, in essence, one cannot accept gift in cash beyond Rs 2 lakh on one occasion from a single donor. Those who accept cash beyond Rs 2 lakh in contravention of this provision, can be subjected to a penalty equal to cash received.
"On violation, penalty equal to cash receipt shall be levied on the person who received cash of Rs2,00,000 or more. Therefore, when the seller of goods or service provider can not receive cash of Rs200,000/- or more, indirectly the same is the maximum limit for payer also. For example, various payments made to caterer or dress designer based on functions during a wedding will be considered in relation to one event or occasion and if he receives aggregate cash payment of Rs. 200,000/- or more it will be in violation," said Gopal Bohra, Partner, NA Shah Associates.
How does one avoid penalties?
The key point is that in order to avoid any penalties, cash transactions should not cross the threshold. In the event it exceeds the permissible amount, then tax payer will be liable to pay a penalty which is of same amount as the cash received during such transaction. These provisions were introduced by the authorities to promote digital economy and to curb tax frauds and practice of black money in the economy.
Disallowance applicable to all the taxpayers for amounts paid in cash: The tax laws allow you certain deductions only if the same have been paid otherwise than by cash. For business expenditure, there is a limit prescribed for incurring expenditure in cash, although no such limit is prescribed for personal expenditure. If you are self-employed, you cannot claim any expenditure beyond Rs 10,000/- if paid for in cash to a person on a single day. However, there are some exceptions too: In case payment is being made for plying, hiring or leasing goods carriages ( for transportation) the limit is Rs 35,000, instead of Rs 10,000.
"The above provision clearly stipulates that in case a person incurs any expenditure for his business or profession, in respect of which payment or aggregate of payments made in cash in a day exceeds Rs. 10,000/-, 100% of such payment will be disallowed while computing his taxable income from business/ profession. Further, in case an allowance has been made in respect of any liability incurred by a person for any expenditure, and then during any subsequent year the person makes payment in respect thereof in cash, the payment is chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day exceeds Rs. 10,000/," said Sandeep Bajaj, Managing Partner, PSL Advocates & Solicitors.
If Rs 2 lakh cash received in a day is from the government, any banking company, post office savings bank or co-operative bank, or persons and receipts which are notified by central government are not subject to any penalties.
Acceptance and repayment of loans beyond Rs 20,000.
A person cannot accept cash loan or deposit of Rs 20,000 or more from another person, and nor can a person repay the loan or deposit in cash, if the amount is Rs 20,000 or more. If an individual accepts or repay loans over the specified limit then tax authorities can levy a penalty equal to the amount of loan so accepted or repaid in cash.
" This limit of Rs. 20,000/- is not considered with respect to each transaction of loan but will apply to each acceptance which will result into making the balance in the loan account exceed Rs. 20,000/ or for each repayment of any loan if the balance exceeds Rs. 20,000/- at the time of such repayment, irrespective of the amount of the individual transaction of acceptance or repayment. The exception to this is transactions with banks, government, Government Company or corporation and other entities as specified by the government. For instance, in case an individual pays to a bank for loan EMIs in cash, then such restriction shall not be applicable," explains Aditya Chopra, Managing Partner, Victoriam Legalis - Advocates & Solicitors.
Cash donations:
Donations made in cash to a registered trust or political party cannot exceed Rs 2,000 in cash. If they do, they are now eligible for deductions under Section 80g.
Premium on health insurance:
Any payment made in cash for premium on account of health insurance facilities is not allowable as deduction under Section 80D of Income Tax Act.