Can cash transactions cost you big in taxes? Understanding penalties, limits & more
Section 40A(3) of the Income Tax Act is one of several provisions aimed at discouraging cash transactions beyond a prescribed limit. It disallows certain business expense deductions if payments above Rs 10,000 are made in cash to a single person in a single day (Rs 35,000 in the case of transporters).
- Aug 8, 2025,
- Updated Aug 8, 2025 12:54 PM IST
With the rapid growth of digital banking, India is steadily moving towards a cashless economy. From UPI payments to net banking, electronic transactions are now faster, more convenient, and increasingly preferred over cash. They not only save time and effort but also help reduce the circulation of black money.
However, for those who still rely on large cash transactions, there’s a catch: you could face significant tax penalties and lose out on deductions.
Section 40A(3) of the Income Tax Act is one of several provisions aimed at discouraging cash transactions beyond a prescribed limit. It disallows certain business expense deductions if payments above ₹10,000 are made in cash to a single person in a single day (₹35,000 in the case of transporters).
To illustrate the consequences, tax advisory platform Tax Buddy recently shared the case of Rahul, who took a Rs 1,20,000 loan from a friend in cash during an emergency. Because the transaction violated the cash acceptance limit, Rahul now faces an income-tax penalty of the same amount.
Key provisions business owners must know
Several sections of the Income Tax Act penalise high-value cash transactions:
> Section 269ST – You cannot accept Rs 2 lakh or more in cash:
From one person in a day
In a single transaction
> For a single event or occasion
Penalty: 100% of the amount received (Section 271DA).
> Section 269SS – No cash loan, deposit or advance of Rs 20,000 or more from a person.
Even borrowing Rs 25,000 in cash from a friend violates the rule. Penalty: 100% of the amount (Section 271D).
> Section 269T – No cash repayment of a loan, deposit or advance of Rs 20,000 or more.
Applies whether repayment is to an individual, NBFC, or any entity. Penalty: Equal to the amount repaid (Section 271E).
> Section 40A(3) – Business expenses over Rs 10,000 in cash (Rs 35,000 for transporters) are not allowed as deductions. This raises taxable profits and increases tax liability.
> Section 80G – Donations above Rs 2,000 in cash are ineligible for deductions. Only bank, UPI, or cheque payments qualify.
> Section 80D – Health insurance premiums must be paid digitally to claim deductions. Cash payment disqualifies the benefit, except for preventive health check-ups up to Rs 5,000.
> Section 194N – Banks levy TDS on large cash withdrawals:
2% if withdrawals exceed Rs 1 crore in a year
5% if no ITR filed for 3 years and withdrawals exceed Rs 20 lakh
Exceptions and additional rules
The Rs 35,000 limit for transporter payments recognises the nature of goods transport operations. Certain commission agents handling goods on behalf of others are also exempt.
Importantly, if you’ve claimed an expense deduction on an accrual basis in an earlier year but pay it in cash above the limit in a later year, it will be deemed your income in that later year under Section 40A(3A).
Bottom Line
In an era where digital payments are accessible to all, heavy cash transactions can bring more trouble than convenience. Whether you’re a business owner or an individual, staying within the prescribed limits — or better, going cashless — isn’t just about compliance. It’s about avoiding unnecessary tax hits that could otherwise be entirely preventable.
With the rapid growth of digital banking, India is steadily moving towards a cashless economy. From UPI payments to net banking, electronic transactions are now faster, more convenient, and increasingly preferred over cash. They not only save time and effort but also help reduce the circulation of black money.
However, for those who still rely on large cash transactions, there’s a catch: you could face significant tax penalties and lose out on deductions.
Section 40A(3) of the Income Tax Act is one of several provisions aimed at discouraging cash transactions beyond a prescribed limit. It disallows certain business expense deductions if payments above ₹10,000 are made in cash to a single person in a single day (₹35,000 in the case of transporters).
To illustrate the consequences, tax advisory platform Tax Buddy recently shared the case of Rahul, who took a Rs 1,20,000 loan from a friend in cash during an emergency. Because the transaction violated the cash acceptance limit, Rahul now faces an income-tax penalty of the same amount.
Key provisions business owners must know
Several sections of the Income Tax Act penalise high-value cash transactions:
> Section 269ST – You cannot accept Rs 2 lakh or more in cash:
From one person in a day
In a single transaction
> For a single event or occasion
Penalty: 100% of the amount received (Section 271DA).
> Section 269SS – No cash loan, deposit or advance of Rs 20,000 or more from a person.
Even borrowing Rs 25,000 in cash from a friend violates the rule. Penalty: 100% of the amount (Section 271D).
> Section 269T – No cash repayment of a loan, deposit or advance of Rs 20,000 or more.
Applies whether repayment is to an individual, NBFC, or any entity. Penalty: Equal to the amount repaid (Section 271E).
> Section 40A(3) – Business expenses over Rs 10,000 in cash (Rs 35,000 for transporters) are not allowed as deductions. This raises taxable profits and increases tax liability.
> Section 80G – Donations above Rs 2,000 in cash are ineligible for deductions. Only bank, UPI, or cheque payments qualify.
> Section 80D – Health insurance premiums must be paid digitally to claim deductions. Cash payment disqualifies the benefit, except for preventive health check-ups up to Rs 5,000.
> Section 194N – Banks levy TDS on large cash withdrawals:
2% if withdrawals exceed Rs 1 crore in a year
5% if no ITR filed for 3 years and withdrawals exceed Rs 20 lakh
Exceptions and additional rules
The Rs 35,000 limit for transporter payments recognises the nature of goods transport operations. Certain commission agents handling goods on behalf of others are also exempt.
Importantly, if you’ve claimed an expense deduction on an accrual basis in an earlier year but pay it in cash above the limit in a later year, it will be deemed your income in that later year under Section 40A(3A).
Bottom Line
In an era where digital payments are accessible to all, heavy cash transactions can bring more trouble than convenience. Whether you’re a business owner or an individual, staying within the prescribed limits — or better, going cashless — isn’t just about compliance. It’s about avoiding unnecessary tax hits that could otherwise be entirely preventable.