Restrictions on Cash Transfers in India

Cash transfers being discouraged

Cash, in the form or coins or currency notes, has been the major form of money used for financial transactions in India.

But giving and accepting cash without knowing the restrictions imposed on cash transfers by the Income Tax Act and other statutes may put you in great trouble. This is an attempt to compile some of such restrictions at one place.

Income tax law restricts high value cash transactions.

The act restricts any person receiving an amount of 2 lakh rupees or more in cash, from a person in a day, in respect of a single transaction or in respect of transactions relating to one event, or occasion from a person, under Section 269ST of the Income Tax Act.

However, this Section is not applicable to a government office or any banking institution, post office or cooperative bank. Therefore one can make payment of money in cash for any amount to such offices.

Punishment for such transactions

To ensure enforcement of the provision, a penal Section 271DA of the Income Tax Act was introduced in the act. It imposes a penalty. Any person who engages in a transaction of Rs 2 Lakh or above in cash, will be liable to a penalty of an amount equivalent to the amount of transaction. This has come into effect from 1st April 2017.

The penalty will be imposed on a person who receives a sum of Rs 2 Lakh and above in cash. The penalty will be a sum equal to the amount of such receipt. The penalty shall however not be levied if the person proves that there were sufficient reasons for doing so.

Matters on which such restrictions exist

Cash Receipt of Rs 2 lakh or more from a single person in a day is not allowed even if the amount has been paid through multiple occasions or transactions on the day and each one of the transactions is below Rs 2 lakh.

Cash receipts of Rs 2 Lakh or more which are related to a single transaction (example: sale of an old car) are prohibited. splitting of payments over several days is also prohibited.

Cash transactions or cash receipts related to a single event or occasion such as wedding, cannot be more than Rs 2 Lakh.

Payment modes like bearer cheque and self-cheque will also be considered on par with cash-based transaction only.

The restriction of receipt of money in Cash of Rs 2 Lakh or above is applicable irrespective of its purpose such as personal or business, capital or revenue, tax-free or taxable amount etc.

Restrictions on donation, loan or sale of property

Payment of any donation in cash exceeding Rs 2,000 is not permitted.  The Economic Times on 23rd January 2018 reports that the Income Tax department, in advertisements issued in leading dailies, said a person should not “donate in excess of Rs 2000 in cash to a registered trust/political party”. Similarly deductions under Section 80 G of the Income Tax Act against contributions made to some recognised relief funds and charitable institutions can only be claimed only when the contribution is made by cheque, draft, or cash. Any donations made in cash for an amount exceeding Rs 2,000 will not be allowed as a deduction but the donations above Rs 2,000 made in any mode other than cash would qualify for such a deduction under the section.

Loans or Deposits cannot be paid or repaid in cash in excess of Rs 20,000 or more.

In selling of immovable property, one should not accept sale consideration of immovable assets in cash in excess of Rs. 20,000. Exceeding the limit of Rs. 20, 000 may lead to a penalty of 100%. The limit set for a cash loan is set to Rs. 20, 000 as per the Section 269SS and 269T of the Income Tax Act. Payment of an amount exceeding this limit of Rs 20,000 is not allowed without a valid reason in writing.

Payment of above Rs 10,000 per person, cannot be made for any business payment towards any expenses or purchase of capital asset.

Payment of 2 lakh or more must be in electronic form

A transaction of an amount equal to Rs 2 lakh or more is allowed through an account payee cheque, or an account payee bank draft, or use of electronic clearing system (ECS) through a bank account.

The ECS includes payment through credit card, debit card, net banking, IMPS (Immediate Payment Service), UPI (Unified Payment Interface), RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), and BHIM (Bharat Interface for Money) Aadhar Pay.

Payment of an amount of ₹2 lakh or more is allowed through any of the above said electronic transfer mechanisms.

Cash transaction limit in business expenditure

In business expenditure, any payment made to a person, in a day, for a single payment exceeding Rs. 10,000 (for plying, hiring or leasing of goods carriage the limit is Rs 35,000) other in cash will be disallowed as an expenditure item recorded in the book of accounts, as per the Section 40A(3)(a) of the Income Tax Act. The Section only disallows any expenditure incurred and therefore, purchase of capital assets does not come under its purview.

But some exceptions such as government payments, bank payments etc, are provided under 6DD of the Income Tax Rules in regard to this restriction.

No limit on cash deposit to bank account

There is no limit or tax set by the Reserve Bank of India (RBI) on cash deposits in bank accounts.

But the depositor is required to provide a valid explanation of the deposits made into their bank accounts. These deposits must be considered carefully at the time of Income Tax filing.

Amount of cash one can carry or keep at home

No specific limit is set for the amount one carry in private or public transport.

However, at the time of the general election in India, one cannot carry cash of more than Rs. 50, 000 without at least three kinds of documentary proof – the source, the business and the end-use of the cash.

Similarly, no legal limit is set for the money one can keep at home. The person should show the source of money and give valid reason for keeping the liquid cash at home when any inquiry is conducted. Failure to explain the source at the time of inquiry would lead to 137% of penalty for the cash kept at home.

High value transactions that are under scrutiny

The following officers or institutions must report high value cash receipts, purchase of shares, mutual funds, immovable property, term deposits, sale of foreign currency to the tax authorities in Form 61A of the income tax act. This is aimed at curbing black money and tracking high value transactions.

Immovable Property: The Registrar of transfer of properties must report purchase & sale of all immovable property for more than Rs 30 Lakh to the Income Tax authorities.

Professionals: The Professionals must inform the tax department of receipt of cash payment exceeding Rs 2 lakh for sale of any goods or services.

Cash Deposits in Banks: Banks will have to report cash deposits aggregating Rs 10 lakh or more in a financial year in one or more savings bank accounts.

Term Deposits in Banks:  Banks and Post offices will have to report cash deposits aggregating Rs 10 lakh or more in a financial year in one or more Time Deposit accounts of a person.

Cash payment for bank draft: Banks must report any cash payment of Rs 10 lakh or more in a financial year for purchase of bank drafts or pre-paid instrument issued by RBI.

Credit Card Bill Payments: Credit Card bill payments of more than Rs 1 Lakh per annum in cash or more than Rs 10 Lakh through Cheques / NEFT transfers etc will have to be reported.

Investments in Financial Securities: The company must report receipt of Rs 10 lakh or more from a person/an investor in a financial year for acquiring bonds, debentures, shares or mutual funds.

RBI guidelines on restricting cash transactions

The RBI guidelines on cash transactions are as follows:

Banks are required to issue travellers cheques, demand drafts, mail transfers, and telegraphic transfers for Rs.50,000 and above only by debit to customers’ accounts or against cheques and not against cash.

The applicants (whether customers or not) for the above transactions for amount exceeding Rs.50,000 should affix permanent (Income tax) account number on the applications.

The banks are required to keep a close watch of cash withdrawals and deposits for Rs.10 lakhs and above in deposit, cash credit or overdraft accounts and keep record of details of these large cash transactions in a separate register.

Identification and Reporting of Suspicious Transactions

Branches of banks are required to report all cash deposits and withdrawals of Rs.10 lakh and above, as well as transactions of suspicious nature with full details in fortnightly statements to their controlling offices. The controlling offices, in turn, are also required to apprise their Head offices regarding transactions of suspicious nature.  The head offices should report transactions of suspicious nature to the appropriate law enforcement authorities designated under the relevant laws governing such activities. Whenever such authority directs the bank should freeze the suspicious account of such persons.

Reference Sources

  1. The Income Tact Act, 1961
  2. Reserve Bank of India : Guidelines
  3. Say no to cash transactions (Income Tax Department)