Say No to Cash Transactions: Understanding Income Tax Implications
The Income Tax Department strongly advocates responsible use of cash to ensure compliance with tax laws. Various provisions in the Income Tax Act restrict excessive cash transactions, and violating these rules can lead to increased tax liabilities and penalties. The government’s goal is to formalize the economy and curb illicit cash transactions.
Key Restrictions on Cash Transactions
1. No Tax Deductions for Certain Cash Transactions
Certain payments made in cash do not qualify for tax deductions. These include donations to political parties, scientific research contributions, rural development, and specific business expenses. If cash is used in these transactions, exemptions and deductions are denied, thereby increasing taxable income.
2. Denial of Exemptions for Political Donations
Under Sections 13A and 13B, political parties cannot receive cash donations exceeding Rs 2,000. Electoral trusts also lose their tax exemption if they accept cash beyond this limit. This regulation ensures transparency in political funding.
3. Restrictions on Borrowing and Repaying via Hundi
Section 69D states that any amount borrowed or repaid in cash through a hundi (a financial instrument) is considered income and taxed accordingly in the financial year of the transaction.
Business Expense Disallowances
4. Disallowance of Business Expenses Paid in Cash
Under Section 40A(3), business expenses exceeding Rs 10,000 paid in cash on a single day are not eligible for tax deductions. If unpaid liabilities from a previous year are settled in cash exceeding Rs 10,000, the amount is considered taxable income for the year of payment.
For businesses engaged in plying, hiring, or leasing goods carriages, the cash expense limit is Rs 35,000 instead of Rs 10,000.
Capital Expenditure and Asset Depreciation Restrictions
5. No Depreciation for Cash Purchases
If a person purchases an asset and pays more than Rs 10,000 in cash, the amount is not considered part of the asset’s cost. Consequently, depreciation on that amount cannot be claimed under Section 43(1).
6. No Deductions for Capital Expenditure in Cash
Section 35AD allows tax deductions for capital expenses in specified businesses, but payments exceeding Rs 10,000 in cash are not eligible for these deductions.
Donation and Tax Deduction Limits
7. Cash Donations Are Restricted
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General Charitable Donations: Donations exceeding Rs 2,000 in cash are not eligible for deductions under Section 80G.
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Scientific Research and Rural Development: Contributions over Rs 2,000 must be made through non-cash modes for tax benefits under Section 80GGA.
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Political Contributions: Companies and individuals cannot claim deductions for political contributions made in cash under Sections 80GGB and 80GGC.
Encouraging Cashless Transactions
8. Health Insurance Premiums Must Be Paid Digitally
Under Section 80D, health insurance premiums must be paid through non-cash modes to claim tax deductions. However, payments for preventive health check-ups can be made in cash.
9. Higher Tax Audit Threshold for Digital Transactions
Businesses with cash transactions under 5% of total receipts and payments qualify for a higher tax audit threshold of Rs 10 crore under Section 44AB. Otherwise, the standard limit remains Rs 1 crore.
10. Lower Presumptive Tax for Digital Payments
Under Section 44AD, businesses receiving payments digitally benefit from a reduced presumptive tax rate of 6% instead of 8%. The discount applies if receipts are through bank transfers, electronic clearing systems, or prescribed electronic modes.
TDS on Cash Transactions
11. TDS on Cash Withdrawals Over Rs 1 Crore
Section 194N imposes a 2% TDS on cash withdrawals exceeding Rs 1 crore in a financial year from banks, co-operative societies, or post offices. If the person has not filed income tax returns for three years, the TDS rate is:
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2% for withdrawals between Rs 20 lakh and Rs 1 crore
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5% for withdrawals exceeding Rs 1 crore
12. TDS on Cash Payments for Professional Services
Under Section 194M, individuals or HUFs making payments exceeding Rs 50 lakh in a year for professional services or labor contracts must deduct 5% TDS, regardless of the mode of payment.
Mandatory Filing of Income Tax Returns
13. Compulsory ITR Filing for High-Value Transactions
As per the seventh proviso to Section 139(1), individuals must file income tax returns if they:
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Deposit Rs 1 crore or more in current accounts
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Spend more than Rs 2 lakh on foreign travel
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Spend over Rs 1 lakh on electricity bills
Failure to file returns by the due date under Section 234F results in a penalty of Rs 5,000 along with applicable interest and further legal consequences.
Conclusion
The government’s measures to restrict cash transactions are part of a larger effort to curb black money and promote a digital economy. Understanding these tax provisions helps individuals and businesses comply with regulations and avoid unnecessary tax burdens. To maximize tax benefits and ensure compliance, opting for digital transactions over cash is the best approach.
