Consequences of Cash Transaction : Know This Before Using Cash

The Alchemy of Cash Transactions: An Insight for A Common Man

In today’s fast-paced digital age, cash transactions, though losing prevalence, still maintain a significant role in our day-to-day financial operations. From street vendors to established businesses, cash remains a force to reckon with, flowing steadily through the veins of the economy. But, with great cash flow, come great responsibilities. It’s essential to be cognizant of some of the stipulations regarding cash transactions. In this article, we’re going to dive deep into the sea of cash transactions. Strap in! You’re in for a buoyant ride in the ocean of finance.

Cash transactions can either be consumer-oriented or business-oriented. Each time you buy a cup of coffee using a crisp note straight from your wallet, you’re partaking in a consumer-oriented cash transaction. On the contrary, when a business procures raw materials for production with direct payments, it’s engaged in a business-oriented cash transaction.

However, as easy and simple as it sounds, cash transactions come with their own set of compliances, directed by the Income Tax Department. For instance, there are stringent rules pertaining to the acceptance or repayment of loans in cash, making cash donations, paying premiums on health insurance, and more. Failing to adhere to these norms can prompt serious repercussions, which we’ll elaborate on in the subsequent sections.

Here’s a glimpse of the deep dive we’re about to take:

• Understanding the Cash Transaction Rules: A section-wise guide to the regulatory sandbox of cash transactions.
• Consequences of Transgression: What happens when you play fast and loose with these rules? Penalties, effects, disallowances – we unpack it all.
• Exceptions to the Rule: Who are the chosen ones exempted from these rules? Let’s find out.
• The Future is Digital: We chalk out the benefits of transitioning from cash to digital transactions and how it can affect your financial behavior positively.

Stay tuned as we unfold the layers of complexity encircling cash transactions, one by one, making it easy for a layman to understand and comply with.

Understanding the Cash Transaction Rules

To navigate the world of cash transactions, it is crucial to familiarize ourselves with the specific rules and guidelines set forth by the Income Tax Department. In this section, we will delve into each of these rules, highlighting their implications and restrictions. Let’s explore:

1. Accepting Loans or Deposits

According to the income tax regulations, no person is allowed to accept cash amounts of Rs. 20,000 or more for any loan, deposit, or in relation to the transfer of any immovable property. However, there are exceptions to this rule. Cash received from the government, banking companies, post office savings banks, cooperative banks, corporations established by central or state Acts, and specific institutions specified by the Central Government is permissible. Additionally, individuals with agriculture income, where both the recipient and the payer are not chargeable to income tax, are also exempted. Violations of this provision can attract penalties.

2. Repayment of Loans or Deposits

When it comes to the repayment of loans or deposits, there are limitations on cash transactions as well. Banking companies, cooperative societies, firms, and other entities are not permitted to repay any loan or deposit in cash if the amount, along with interest, exceeds Rs. 20,000. Similar to the previous rule, there are exceptions for transactions with governmental entities, banking companies, post office savings banks, cooperative banks, corporations established by Acts, and other specified institutions or bodies. It is pertinent to note that TDS (Tax Deducted at Source) at a rate of 2% is applicable on cash withdrawals of Rs. 1 crore or more in a year for business purposes.

3. Other Cash Transactions

Section 269ST of the Income Tax Act prohibits the receipt of Rs. 2,00,000 or more in cash in any of the following scenarios: aggregate from a single person in a day, for a single transaction, or for transactions related to a specific event or occasion. In the case of business entities with an annual turnover exceeding Rs. 50 crores, accepting payment through prescribed electronic modes or other electronic modes becomes compulsory. Failure to comply can lead to penalties of Rs. 5,000 for each day of non-compliance.

Disallowance of Expenses Incurred in Cash

As per Section 40A(3) of the Income Tax Act, if a person incurs any expenditure for business or profession and makes a payment exceeding Rs. 10,000 in cash in a single day, such payment will be disallowed while calculating the taxable income. However, exceptions are provided for certain categories, which can be referred to under Rule 6DD of the Income Tax Rules.

5. Deemed Income of Subsequent Year

If an allowance has been made for any liability incurred for any expenditure, and the payment is made in cash in any subsequent year, the payment is treated as income of the subsequent year if the payment exceeds Rs. 10,000 in a day. For payments made for plying, hiring, or leasing goods carriages, the limit is increased to Rs. 35,000.

6. Disallowance in Respect of Fixed Assets

Expenditure incurred for the acquisition of any asset, where the payment or aggregate payments made in cash exceed Rs. 10,000 in a day, is not included for the purpose of determining the actual cost of the asset. This means that no depreciation benefit will be available on such capital expenditure incurred in cash.

7. Cash Donations

Cash donations made to a registered trust or political party, exceeding Rs. 2,000, are not eligible for deduction under Section 80G of the Income Tax Act.

8. Premium on Health Insurance

Payments made in cash as premiums for health insurance policies are not allowable as deductions under Section 80D of the Income Tax Act.

These rules aim to promote transparency and curb the circulation of unaccounted money in the economy. Violating these provisions can have serious consequences, which we will explore in the next section.

In the next part, we will dive into the compelling consequences of transgressing the cash transaction rules. Stay tuned for a gripping read that highlights penalties, effects, and disallowances.

Consequences of Transgression

Adhering to the rules and regulations surrounding cash transactions is of utmost importance, as failing to do so can lead to severe consequences. In this section, we will explore the penalties, effects, and disallowances that individuals and businesses may face if they violate the cash transaction rules.

1. Penalties for Accepting Loans or Deposits in Cash

If a person accepts cash amounts of Rs. 20,000 or more for loans, deposits, or in relation to the transfer of immovable property, and violates the specified rules, they may be subjected to penalties. The penalty is levied for an amount equal to the sum of the loan or deposit repaid in cash. It is crucial to adhere to these rules and ensure that proper documentation and electronic transactions are in place to avoid penalties.

2. Penalties for Repayment of Loans or Deposits in Cash

If banking companies, cooperative societies, firms, or individuals repay loans or deposits in cash, violating the prescribed limits, penalties may be imposed. The penalty amounts to an equivalent sum of the loan or deposit repaid in cash. To avoid penalties, it is advisable to make transactions through prescribed modes such as electronic fund transfers or checks.

3. Penalties for Other Cash Transactions

Section 269ST of the Income Tax Act imposes penalties on individuals or businesses for receiving cash amounts of Rs. 2,00,000 or more in a single day, for a single transaction, or in relation to transactions related to a specific event or occasion. In case of non-compliance, penalties may be imposed under section 271DA. The penalty amount is equal to the sum of the cash received in violation of the specified limits. It is essential to adhere to the prescribed rules and encourage digital transactions to avoid penalties.

4. Disallowance of Expenses Incurred in Cash

If a person incurs any business or professional expense exceeding Rs. 10,000 in cash in a single day, a disallowance may occur when calculating taxable income. Disallowed expenses reduce the taxable income, resulting in higher tax liability. Exceptions to this rule can be referred to under Rule 6OD of the Income Tax Rules.

5. Deemed Income of Subsequent Year

Payments made in cash for liabilities incurred in a previous year can be treated as deemed income in the subsequent year if the payment or aggregate of payments exceeds Rs. 10,000 in a single day. This deemed income is taxable in the subsequent year, leading to additional tax liabilities. For payments related to plying, hiring, or leasing goods carriages, the threshold is increased to Rs. 35,000.

6. Disallowance in Respect of Fixed Assets

Expenditures made in cash exceeding Rs. 10,000 in a single day for the acquisition of fixed assets are not considered for determining the actual cost of the asset. As a result, the depreciation benefit associated with such capital expenditures is not available. It is advisable to make payments for fixed assets through non-cash modes to maximize tax benefits.

7. Disallowance of Cash Donations and Health Insurance Premiums

Cash donations made to registered trusts or political parties exceeding Rs. 2,000 are not eligible for deductions under Section 80G of the Income Tax Act. Similarly, payments made in cash towards health insurance premiums are not allowable as deductions under Section 80D. To avail the benefits of deductions, it is essential to make such payments through the prescribed modes.

Violating these cash transaction rules can result in penalties, disallowances, and additional tax liabilities. To ensure compliance, individuals and businesses should actively embrace digital transactions and maintain detailed records of all financial transactions.

Exceptions to the Rule

While the cash transaction rules apply to a wide range of scenarios, there are exceptions to these provisions. In this section, we will explore circumstances where the specified rules do not apply. Let’s dive in!

1. Exceptions for Accepting Loans or Deposits

Certain entities are exempted from the rule of not accepting cash amounts of Rs. 20,000 or more for loans, deposits, or in relation to the transfer of immovable property. The exceptions include:

• Amounts accepted from the government, banking companies, post office savings banks, cooperative banks, and corporations established by central or state Acts. These entities have their own processes and regulations to ensure transparency and accountability.
• Specific institutions or bodies specified by the Central Government through notifications in the Official Gazette.
• Transactions between individuals having agriculture income, where both the recipient and the payer are not chargeable to income tax.

For transactions falling under these exempt categories, cash amounts exceeding Rs. 20,000 can be accepted without violating the rules.

2. Exceptions for Repayment of Loans or Deposits

Similar to accepting loans or deposits, certain exceptions apply when it comes to repaying loans or deposits in cash. The exceptions include:

• Repayment of loans, deposits, or specified sums taken or accepted from the government, banking companies, post office savings banks, cooperative banks, corporations established by central or state Acts, and institutions or bodies specified by the Central Government.
• Transactions of a specific nature referred to in section 269SS of the Income Tax Act.

These exceptions ensure that businesses and individuals can fulfill their repayment obligations without facing penalties.

3. Exceptions for Other Cash Transactions

Section 269ST of the Income Tax Act specifies exceptions to the rule that prohibits the receipt of Rs. 2,00,000 or more in cash. The exceptions include:

• Receipts by the government, banking companies, post office savings banks, cooperative banks, and transactions referred to in section 269SS.
• Other persons or class of persons or receipts as specified by the Central Government through notifications in the Official Gazette.

Businesses with an annual turnover exceeding Rs. 50 crores are required to accept payments through prescribed electronic modes or other electronic modes. Failure to comply may result in penalties, as mentioned earlier. However, for non-business transactions, these rules do not apply.

4. Exceptions for Disallowance of Expenses Incurred in Cash

While expenses incurred in cash exceeding Rs. 10,000 in a day are generally disallowed under Section 40A(3) of the Income Tax Act, exceptions are provided. These exceptions can be referred to under Rule 6OD of the Income Tax Rules. The exceptions ensure that certain expenses, such as those incurred in exceptional circumstances or emergencies, are not subject to disallowance.

Understanding these exceptions is vital for individuals and businesses to ensure compliance while also taking advantage of legitimate transactions.