India’s New Cash Payment Rules: What You Must Know

Ever tried handing over a fat stack of cash for your business and wondered if the taxman might give you the side-eye? You’re not alone. India’s tax rules have been getting stricter about cash transactions, and if you’re not careful, you could lose deductions—or worse, face penalties.

1. Section 40A(3): Your ₹10,000 Cash Limit

Imagine you’ve bought raw materials for ₹75,000 and paid your supplier in cash. Ouch. Because Section 40A(3) says you can’t claim any expense over ₹10,000 paid in cash in a single day to one person—unless you’re in transport, where the limit is ₹35,000. So that ₹75,000? Not deductible. The rule forces you to use an account-payee cheque, bank draft, or an electronic transfer. No more secret cash deals for big-ticket items.

2. Section 40A(3A): The Grace Period

We all make mistakes. Say you paid ₹25,000 in cash in June but realize the error in September. If you convert that cash payment to a cheque or online transfer before the end of the same financial year—or before filing your return—you can still claim it. Think of this as your do-over window. Just don’t snooze on it.

3. No More Cash Loophole for Assets

Remember when buying a machine in cash meant you dodged Section 40A(3)? That loophole’s gone. Now, any cash payment over ₹10,000 for a capital asset (like machinery) won’t count toward depreciation. You lose tax benefits on that chunk of cash, so better wire the money.

4. Trusts and Charities: 85% Spent Must Be Digital

If you run a charitable or religious trust, you need to spend at least 85% of your income to keep Section 11’s tax exemption. Since the Finance Act 2018, any cash payment over ₹10,000 doesn’t count toward that 85%. The message is clear: digital payments only.

5. Section 269SS: No Big Cash Loans

Want to borrow or accept a deposit of ₹20,000 or more in cash? You can’t. Even if you already owe someone ₹15,000 and take another ₹8,000, it’s illegal unless you use a bank channel. The penalty? Equal to the cash amount received. So take out your phone or cheque book and save yourself the headache.

6. Section 269T: Pay Back Through the Bank

When you repay loans or deposits totaling ₹20,000 or more, you’ve got to do it digitally, too. Break this and you’ll pay a penalty equal to the cash you handed over. Keep those transfers neat and digital.

7. Section 269ST: No ₹2 Lakh Cash Receipts

Since 2017, you can’t receive ₹2 lakh or more in cash from one person in one day, or for related transactions. Government bodies, banks, and a few other entities are exceptions, but for most of us, the rule stands. NBFCs and HFCs get special treatment where each loan installment is a separate transaction—no aggregation.

Just recently, the Supreme Court emphasized that property deals and sub-registrar offices must flag any cash over ₹2 lakh. Break this rule, and you’re looking at a penalty equal to the amount received—unless you can justify it.

8. TCS on Cash Sales: The One-Percent Rule

Back in 2016–17, there was a 1% tax collected at source (TCS) on cash sales over ₹2 lakh. But when Section 269ST kicked in for bullion and jewellery, TCS went out the window. So don’t worry about that 1% for most big cash sales today.

9. What’s Brewing in the Income Tax Bill 2025?

The Finance Ministry introduced a new Income Tax Bill in February 2025 to simplify language and cut outdated rules. But don’t get too relaxed: proposals include lowering daily cash limits to ₹1 lakh and bringing cryptocurrencies under the definition of undisclosed income. They even want digitized searches of virtual spaces. Change is coming fast, so stay alert.