Cash Transaction Limits Every Business Should Know
Cash is legal. Cash above certain limits is expensive. The provisions restricting cash dealings are among the few in tax law where the penalty can equal the entire amount involved, and they catch ordinary businesses far more often than they catch anyone evading tax.
Payments: section 40A(3)
An expenditure paid in cash above ₹10,000 to a single person in a single day is disallowed as a deduction. For payments to transporters the limit is ₹35,000.
Two details matter. The test is per person, per day — splitting one bill into three cash payments on the same day does not help. And the disallowance is of the whole payment, not the excess over the limit.
Receipts: section 269ST
No person may receive ₹2 lakh or more in cash:
- from one person in a day; or
- in respect of a single transaction; or
- in respect of transactions relating to one event or occasion.
The penalty is equal to the amount received. This is the harshest of the set, and it applies to the recipient. Splitting a large receipt across several days does not escape it where the payments relate to a single transaction.
Loans and deposits: sections 269SS and 269T
Accepting a loan, deposit or specified sum of ₹20,000 or more otherwise than by banking channel attracts a penalty equal to the amount. Repaying such a loan in cash attracts the same under 269T.
This is where family-run businesses get hurt most. A director bringing in ₹50,000 cash to meet a payroll shortfall, recorded honestly as an unsecured loan, is a penalty waiting to be levied.
Related limits worth knowing
- Capital expenditure paid in cash above ₹10,000 is not eligible for depreciation.
- Donations above ₹2,000 in cash get no deduction under section 80G.
- Health insurance premium paid in cash gets no deduction under 80D, though preventive health check-ups are an exception.
- Property transactions attract their own reporting, and cash components create exposure well beyond income tax.
Practical points
- Route every vendor payment, loan and repayment through banking channels, without exceptions for urgency. The exceptions are where the penalties come from.
- Brief whoever handles petty cash on the ₹10,000 per-person-per-day limit. Most breaches are clerical, not deliberate.
- Where cash receipts are part of your trade, put a hard system limit below ₹2 lakh rather than relying on judgement at the counter.
- Record director and family funding as a bank transfer, every time. It costs nothing and removes the 269SS risk entirely.
- Review the cash ledger quarterly rather than at audit. A breach found in September can be explained; one found in November is already in the report.
Want your cash controls reviewed before they become a penalty? Talk to Kunal P Shah & Co.