The law bars taxpayers from making payment for expenses in excess of Rs 10,000 to a person in a day via cash. Expenses paid in cash in excess of this limit, cannot be deducted from the income of a business or a profession.
As per World Bank Global Findex Report 2017, nearly 80% Indians own a bank account. Yet, India tops the list of countries with high cash in circulation, which is nearly 10% of our GDP. As per reports, cash holdings are back to and have in fact crossed the levels of pre-demonetisation.
Whatever be the reason, we love holding cash. Interestingly, many cash transactions are banned by law and several penalties have been put in place to curb cash usage. Let’s understand them in more detail.
Ban on receiving cash beyond Rs 2.5 lakh
The law bars you from receiving cash beyond Rs 2.5 lakh. One cannot receive Rs 2.5 lakh from one person in a single day, or receive Rs 2.5 lakh for a single transaction or for multiple transactions relating to a single event. This was made effective April 1, 2017.
The penalty for non-compliance is 100% of the amount so received. Penalty will apply to the person who receives such sums of money. This rule does not apply to banks, government, however, all other types of entities such as individuals, companies, partnership, etc. must comply with it.
This limit will not apply to sums which are covered under 269SS, discussed below. One is free to withdraw cash from bank accounts, post offices as per the applicable withdrawal limits of such banks and this rule will not be attracted to such withdrawals.
Anand, hired an interior decorator to redo his apartment. Anand made 6 cash payments of around Rs 80,000 each over a period of 2 years to the decorator. Such payments would be covered here, person receiving cash, the decorator, will have to pay a penalty which will be equal to the amount received in cash.
[This is as per Section 269ST of the Income Tax Act]Ban on cash expenses beyond Rs 10,000
The law bars taxpayers from making payment for expenses in excess of Rs 10,000 to a person in a day via cash. Expenses paid in cash in excess of this limit cannot be deducted from the income of a business or a profession. Therefore, businesses have to exercise caution with making petty expenses and purchases, the daily cash limit is capped at Rs 10,000.
Aditi, a small business owner, hosts a party at her office for employees and pays Rs 15,000 in cash to the food supplier. Such a payment, made in cash, will not be an eligible business expense and cannot be reduced from her revenue.
[This is as per Section 40A(3) of the Income Tax Act]Ban on receiving cash as deposit, loan or advance for property purchases beyond Rs 20,000
This rule bars persons from accepting any loan or a deposit or money as advance for purchase of a property in excess of Rs 20,000. Therefore, advances made for purchase of property cannot be made in excess of Rs 20,000 except when made via a cheque or made electronically or via a bank transfer. This rule does not apply to any loan or deposit or sum, where the person who gives or accepts it and the person who takes or accepts it, both have agricultural income and both don’t have any taxable income.
It also does not apply to sums accepted from or accepted by the government or bank. Any other receiver who accepts cash for loans/deposits/property sold may have to pay a penalty of 100% of the money so accepted, imprisonment up to 2 years may also apply.
Rahul a software developer, has taken a loan of Rs 10,000 via a cheque from his client. He further takes another loan of Rs 15,000 in cash from the client. Rahul is barred from accepting this loan from his client in this case and a penalty may apply.
[This is as per section 269SS of the Income Tax Act]Ban on assets purchased or part payment made in excess of Rs 10,000
If a business pays in cash in excess of Rs 10,000, as payment or part payment for the purchase of an asset to a person in a day, such payment will not be included in the cost of the asset. Which means the business will not be able to capitalise such payment as cost of the asset and therefore, no depreciation will be allowed to be claimed. As can be seen, businesses cannot make expenses in excess of Rs 10,000 or buy assets in cash or make part payments in excess of Rs 10,000 in a day.
Ritwik purchased a printing machinery and paid Rs 15,000 in cash for site installation of the machinery and related equipment, such expenses paid in cash, cannot be capitalised with the cost of the asset and therefore no depreciation can be claimed on this amount.
[This is as per section 43 of the Income Tax Act]Donations made in cash to NGOs in excess of Rs 2,000
The income tax act specifically bans payments made as donations to charitable organisations and NGOs in excess of Rs 2,000, such payments are not eligible as a deduction from income. Similarly, donations to political parties cannot be made in cash at all; any cash donations made are not allowed as a deduction from income.
[This is as per section 80G and 80GGC of the Income Tax Act]What is TCS? applicability on purchase of motor vehicles
Even though making cash payment for the purchase of a car is not allowed based on the rules listed above, another provision has been built into the income tax act, which says that any person, who is selling a motor vehicle for more than Rs 10 lakh must collect TCS @1% from the buyer and deposit it with the government.
The buyer will end up paying an extra 1% over the cost of the car and can claim it at the time of filing a tax return. This is a preventive mechanism that makes sure the government knows PAN and other information related to buyers of cars of value exceeding Rs 10L.
[This is as per section 206C(1F) of the Income Tax Act]
In spite of these bans and regulations, cash continues to thrive in the economy. As a business or an individual one must be aware of the possible consequences of dealing in cash.(Author is founder & chief executive officer of ClearTax.)You can now invest in mutual funds with moneycontrol. Download moneycontrol transact app. A dedicated app to explore, research and buy mutual funds.