Taxation of Cash Transactions

We always do a large amount cash transactions without knowing their implications. In India, cash transactions are carefully regulated by Income Tax Act, 1961, the Prevention of Money Laundering Act (PMLA), 2002, and various banking regulations. The purpose of these regulations is to ensure transparency, minimize the use of unaccounted wealth, and prevent money laundering. So how much cash  cash to be deposited, withdrawn, paid or received should be done carefully considering all these regulations  Below is a detailed article outlining the Taxation of Cash Transactions, key provisions, sections, and acts related to the taxation of cash transactions.

This article is divided into the following sections:

• Cash withdraws rules and regulations including taxation
• Cash deposits rules and regulations including taxation
• Cash expenses treatment and taxation
• Cash payment of loans – taxation
• Penalties for cash withdrawals and deposits
• FAQ’s on cash transactions

Cash withdraws rules and regulations including taxation

    ATM Withdrawal Limits

• ATM withdrawal limits typically vary from ₹20,000 to ₹1,00,000 per day, depending on the type of ATM card (e.g., Classic, Gold, Platinum) and the bank’s policies, as per the Reserve Bank of India (RBI) guidelines.
• These limits are set by individual banks based on their risk assessment and customer profile.

   Cash Withdrawal Limits and Taxation for Current and Saving Accounts

1. Current Account Withdrawal:
   • For current accounts, withdrawals are generally unlimited. However, cash withdrawals above ₹50,000 may require the submission of PAN details (Section 139A of the Income Tax Act).
   • Reporting to the Income Tax Department: For cash withdrawals above ₹10 lakh in a financial year, the bank reports the transaction to the Income Tax Department under Section 285BA.
2. Savings Account Withdrawal:
   • For savings accounts, the same rules apply. PAN is required for withdrawals of ₹50,000 or more.
   • If a person withdraws large sums of cash frequently, such withdrawals may be flagged for scrutiny by the Income Tax Department.

    Section 194N: Tax Deducted at Source (TDS) on Cash Withdrawals

• Section 194N mandates that TDS is deducted when cash is withdrawn exceeding ₹1 crore in a financial year.
• 2% TDS is deducted if cash withdrawals exceed ₹1 crore in a financial year.
• If the individual has not filed Income Tax Returns (ITR) for the last two years, the TDS rate increases to 5%.
• Example: If a person withdraws ₹1.5 crore in a financial year, the TDS will be deducted on ₹50 lakh at 2%, which equals ₹1 lakh.

Cash Deposits: Rules, Limits, and Taxation

1. Cash Deposits in Savings and Current Accounts

1. No Limit on Deposits:
   • There is no specific upper limit on the amount of cash that can be deposited into a Savings or Current Account. However, the Income Tax Act, 1961 imposes reporting requirements for large deposits.
2. Reporting of Large Cash Deposits:
   • Section 285BA of the Income Tax Act, 1961 mandates that banks report cash deposits exceeding ₹10 lakh in a financial year to the Income Tax Department in the Annual Information Return (AIR). This is done to track and prevent tax evasion and ensure that the source of large deposits is legitimate.
3. PAN Requirement:
   • As per Section 139A of the Income Tax Act, 1961, banks require PAN details for cash deposits above ₹50,000 in a single transaction. If you do not provide your PAN, the deposit may be scrutinized by tax authorities.
4. Suspicious Cash Deposits:
   • Under the Prevention of Money Laundering Act (PMLA), 2002, banks are required to report suspicious transactions, including unusually large cash deposits, to the Financial Intelligence Unit (FIU).

Section 68 and 69: Unexplained Income and Cash Deposits

1. Section 68 – Unexplained Cash Credit:
   • If a taxpayer deposits large sums of cash and cannot explain the source of these funds, Section 68 of the Income Tax Act treats it as unexplained income, which will be taxed at 30%.
   • Example: If you deposit ₹5 lakh and cannot explain where the money came from, it will be treated as income and taxed under Section 68.
2. Section 69A – Unexplained Money, Bullion, Jewelry, or Other Valuable Articles:
   • Section 69A of the Income Tax Act applies when a person possesses unexplained cash, bullion, jewelry, or other valuables. If you cannot explain the source, it is treated as unexplained income and taxed at 60% (excluding surcharge and cess).
   • Example: If you deposit ₹20 lakh in cash and cannot justify its source, it will be treated as unexplained money under Section 69A.

Cash Expenses: Taxation and Allowability

Section 40A(3) – Disallowance of Certain Cash Expenses

Under Section 40A(3) of the Income Tax Act, 1961, cash expenses above a certain limit are not allowed as a business expense. The section mandates that if a taxpayer incurs an expense in cash above ₹10,000 (in a single day), such an expense will not be allowed as a deduction, unless it is paid to a government body or in certain prescribed cases.

• Limit for Cash Payments: If a business or profession makes a cash payment exceeding ₹10,000 to a single person in a single day, the payment is disallowed for tax purposes.
• Exception: Payments made to agriculture or for certain specified purchases can be exempt from this rule, as defined by the Income Tax Act.

   Business Expenses in Cash

1. Cash expenses for business:
   • Expenses for business activities that involve less than ₹10,000 in cash are typically deductible under the Income Tax Act, provided they meet the criteria for business expenses.
   • Examples of eligible business expenses could include purchases of goods, salaries, or utility bills, provided they are under the ₹10,000 limit.
2. Employee Salaries and Wages:
   • Payments made to employees in cash for salaries or wages are allowable, but under Section 40A(3), the total amount of wages paid in cash above ₹10,000 per person in a single day will be disallowed for tax purposes.
3. Other Business Payments:
   • Business expenses such as payments for electricity bills, rent, or supplier payments made in cash above ₹10,000 are disallowed under Section 40A(3).

   Practical Examples of Cash Expenses and Their Tax Treatment

1. Purchases for Business:
   • If a business buys raw materials or inventory in cash and the transaction is less than ₹10,000, the expense is allowed. If the transaction exceeds ₹10,000, the expense will be disallowed unless the transaction is made through a bank transfer or cheque.
2. Rent Payments:

• Rent paid to a landlord in cash for less than ₹10,000 a month is allowed, but for rent above ₹10,000 in a month, it should be paid through non-cash methods like cheque or online transfer to ensure it is deductible.

    Section 40A(3): Cash Payments in Business

• If a business makes a cash payment exceeding ₹10,000 to a single party in a single day, the payment is not eligible for deduction under business expenses.
• Cash payments exceeding ₹10,000 will not be allowed as a deduction unless made via bank transfer, cheque, or demand draft.

• EXCEPTION: Payments exceeding ₹10,000 in cash are disallowed as business expenses under Section 40A(3).
  • Payments to farmers, cottage industries, transporters.
  • Payments made on bank holidays or in emergencies.
  • Payments in rural areas without banking facilities.
  • Payments to government agencies, banks, or insurance companies.

• Example: If a business makes a cash payment of ₹12,000 to a vendor, it will not be allowed as a business expense under the Income Tax Act.

Section 285BA: Reporting of Cash Transactions

• Banks and other financial institutions are required to report cash deposits or withdrawals exceeding ₹10 lakh in a financial year to the Income Tax Department.
• This provision ensures that the Income Tax Department is aware of large cash transactions and can investigate them for potential tax evasion.

Penalties for Cash Transactions as per Income Tax Act

• Penalty under Section 271D: If a person accepts a cash loan or deposit exceeding ₹20,000 from a single person, a penalty of 1% of the amount involved can be levied.
• Penalty under Section 271E: If cash is used to repay loans or deposits exceeding ₹20,000, penalty of 1% of the amount is imposed.
• These penalties are intended to discourage the use of unaccounted cash in transactions.

Repayment of Loan in Cash: General Rules

1. Section 269T – Restriction on Repayment of Loans in Cash

Section 269T of the Income Tax Act, 1961 imposes restrictions on the repayment of loans or deposits in cash. According to this section, if the loan amount or deposit amount exceeds ₹20,000, the repayment must not be made in cash. If it is made in cash, it is not allowed as a deduction for tax purposes, and the lender may be subject to penalties.

• Repayment Limit: The cash repayment limit for a loan or deposit is ₹20,000. If the repayment amount exceeds ₹20,000, it must be made via cheque, bank transfer, or any other non-cash mode of payment.
• Penalty for Violation: If a borrower repays a loan or deposit in cash exceeding ₹20,000, the lender will be penalized under Section 271E of the Income Tax Act, which can result in a penalty equal to the amount of cash repayment.
  • Example: If a borrower repays a loan of ₹25,000 in cash, the lender is liable to pay a penalty of ₹25,000 under Section 271E.

1. Section 40A(3) – Cash Payments Over ₹10,000

While Section 40A(3) deals with the disallowance of cash expenses, it is also relevant in the context of loan repayments made by businesses. If a business repays a loan exceeding ₹10,000 in cash, it is not allowed to claim the repayment as a business expense for tax purposes.

• Cash Repayment Limit for Businesses: Any business loan repayment exceeding ₹10,000 in cash is disallowed as an expense under Section 40A(3).

Which File to Use for Cash Transactions?

• For cash transactions (whether deposits, withdrawals, or large sums in a year), you should rely on your AIS.
• AIS will reflect the cash deposit details reported by your bank, and you can use it to cross-check your records for filing your ITR.

Here are some frequently asked questions (FAQs) related to Taxation of Cash Transactions and their implications under Indian tax laws:

1. Is there any limit on cash withdrawals from my account?

• ATM Withdrawal Limit: Typically, it varies between ₹20,000 to ₹1 lakh per day, depending on the bank and card type.
• Bank Withdrawal Limit: You can withdraw up to ₹50,000 per day from your savings account without PAN. For amounts exceeding ₹50,000, PAN is mandatory.

2. Can I repay loans in cash?

• Cash repayment of loans exceeding ₹20,000 is prohibited under Section 269T of the Income Tax Act.
• Penalty: If a loan repayment of more than ₹20,000 is made in cash, the lender faces a penalty equal to the cash repayment amount under Section 271E.

3. What are the cash transaction limits for tax purposes?

• Section 269SS restricts receiving or lending loans or deposits in cash exceeding ₹20,000.
• Section 269ST prohibits cash transactions above ₹2 lakh in a day, either by an individual or an entity. If violated, the transaction can be penalized with a penalty equal to the amount of the transaction.

4. Will cash deposits or withdrawals above ₹10 lakh be reported?

Yes, banks are required to report cash deposits or withdrawals of ₹10 lakh or more in a financial year to the Income Tax Department. These transactions are also included in the AIS (Annual Information Statement).

5. How will my cash transactions affect my Income Tax Return (ITR)?

• If your cash deposits exceed ₹10 lakh in a financial year, the Income Tax Department will have a record of your transactions through the AIS. You should verify your bank statements and AIS while filing your ITR.
• Excessive or unexplained cash deposits can be flagged by the tax authorities, leading to scrutiny or an assessment of unexplained income under Section 68 or Section 69 of the Income Tax Act.

6. Are cash payments for business expenses allowed?

• Section 40A(3) of the Income Tax Act disallows expenses paid in cash exceeding ₹10,000 in a single day. If business expenses such as vendor payments or salaries are made in cash beyond this amount, they will not be deductible.

7. Can I receive cash payments for my business?

• Businesses should avoid receiving cash payments exceeding ₹2 lakh for a single transaction under Section 269ST. If received, the business may be penalized, and the transaction could be flagged for scrutiny.

8. How can I prove the source of cash transactions?

• Source of funds for large cash deposits should be documented. This can be done through:
  • Bank statements
  • Proof of income such as salary slips, business records, or sale documents
  • Tax returns and TDS certificates
  • Gift receipts if cash is received as a gift

Failure to justify the source of large cash deposits may result in the amounts being treated as unexplained income.

9. What happens if I make a large cash deposit without PAN?

• If you deposit ₹50,000 or more in cash without providing your PAN number, the bank will withhold the transaction until you provide your PAN.
• Section 139A of the Income Tax Act requires PAN for any cash transaction above ₹50,000.

10. How can I avoid penalties for cash transactions?

To avoid penalties:

• Ensure cash transactions are below ₹20,000 for loan repayments and deposits.
• If cash payments or receipts exceed ₹2 lakh in a day, use non-cash methods like cheques or bank transfers.
• Maintain proper records of your income, expenses, and source of cash for scrutiny by the tax authorities.

11. Are there any exceptions to cash transaction limits?

Yes, there are certain exceptions, such as:

• Payments made to government authorities (e.g., taxes, fines, etc.).
• Cash payments to farmers or for agricultural-related transactions can have different limits under certain circumstances.

12. Is it legal to store large amounts of cash?

While it is legal to hold large amounts of cash, if you deposit or withdraw large sums, you need to provide the source of the funds to avoid any questions from tax authorities. Unexplained large cash deposits may be treated as black money.