The Income Tax Department urges individuals to use cash responsibly, highlighting that cash transactions, particularly in specific contexts, can result in significant penalties and disallowances of tax deductions. The Income Tax Department has introduced stricter rules on cash transactions. Find out what this means for tax deductions, expenses, and financial dealings. Here is an in-depth look at the key provisions and implications for cash transactions:
Key Provisions on Cash Transactions and Their Impact on Tax Deductions
- Donations to Political Parties and Electoral Trusts (Section 13A, 13B, Rule 17CA): The Income Tax Department specifies that any cash donation exceeding ₹2,000 to political parties will result in a denial of tax exemptions. Additionally, if an electoral trust violates this mandate and accepts cash donations above ₹2,000, it will forfeit its tax exemption status. Political contributions in cash above this limit are no longer eligible for tax deductions, reinforcing the shift towards digital and traceable modes of payment.
- Borrowing and Repayment on Hundi (Section 69D): Cash transactions involving borrowing or repayment of amounts on a hundi (a traditional informal loan form) are considered income. Any amount borrowed or repaid in cash is treated as income in the respective financial year. This provision aims to curb the circulation of unaccounted money in informal loan agreements and reinforces the government’s push for transparency in financial dealings.
- Disallowance of Expenses Incurred in Cash (Section 40A(3)): If any business or professional expenditure exceeds ₹10,000 in cash on a given day, such expenses will not be eligible for tax deductions. This includes payments for business transactions, capital expenditures, and liabilities paid in subsequent years. However, the payment limit is raised to ₹35,000 for goods carriage transactions, considering the prevalence of the unorganized sector. In any case, expenses paid in cash will not be included in the actual cost of an asset, thereby disallowing depreciation on such purchases.
- Cash Donations to Charitable Causes (Section 80G, 80GGA, 80GGB, 80GGC): Tax deductions for charitable funds, scientific research, or rural development cannot be claimed if the donation exceeds ₹2,000 and is made in cash. Cash contributions to political parties (Section 80GGB and 80GGC) are excluded from any deductions. This policy also impacts donations for the employment of new employees under Section 80JJAA, where cash payments disqualify individuals from claiming the corresponding deductions.
- Health Insurance Premium Deductions (Section 80D): Payments for health insurance premiums made in non-cash modes are eligible for tax deductions, except preventive health check-up payments, which can be made in cash.
- Tax Audit Thresholds and Cash Transactions (Section 44AB): From the Assessment Year 2022-23, tax audit thresholds for businesses have been increased to ₹10 crore, provided that cash transactions (receipts and payments) do not exceed 5% of the total transactions in a year. If the cash limits are exceeded, businesses may face a tax audit. The intent is to reduce reliance on cash and encourage companies to shift towards digital transactions, which are more traceable.
- Presumptive Taxation and Cashless Transactions (Section 44AD): Under the presumptive taxation scheme, the tax rate is reduced from 8% to 6% for transactions conducted in a cashless mode, such as through account payee cheques, bank drafts, or electronic payment methods. This provision incentivizes businesses to adopt digital payment methods, thereby reducing the scope for cash-based income that is harder to trace.
- Tax Deducted at Source (TDS) on Cash Withdrawals (Section 194N): A 2% TDS is levied on cash withdrawals above ₹1 crore from banks, cooperative societies, and post offices. In cases where individuals have not filed returns for three consecutive assessment years, the TDS rate increases to 5% for withdrawals between ₹20 lakh and ₹1 crore and 10% for withdrawals exceeding ₹1 crore. This provision aims to curb high-value cash withdrawals often associated with unreported income.
- TDS on Payments Made in Cash (Section 194M): Any individual or Hindu Undivided Family (HUF) making payments exceeding ₹50 lakh to a resident for work contracts or professional services must deduct TDS at 5%, regardless of the payment mode. Including cash payments under this section encourages greater transparency in professional transactions and limits the use of cash to settle large sums.
- Mandating the Filing of Income Tax Returns (Section 139(1) and 234F): The government has mandated that individuals or entities who deposit ₹1 crore or more in their current accounts incur foreign travel expenditures exceeding ₹2 lakhs, or consume electricity worth over ₹1 lakh must file an income tax return, even if they do not meet other income thresholds. Non-compliance will result in penalties of up to ₹5,000 and other consequences under Section 234F.
Impact and Implications of These Provisions
The government’s stance on cash transactions is clear: it aims to reduce the use of cash, combat black money, and ensure that businesses and individuals comply with transparent and traceable financial practices. The increased use of digital payments and restrictions on cash transactions align with broader efforts to formalize the economy and reduce the scope for tax evasion.
While the shift away from cash may initially be challenging for specific sectors, particularly the unorganized ones, the long-term benefits include reduced tax liabilities, better financial tracking, and a more robust tax system. Businesses are strongly encouraged to adopt electronic payment methods to avoid disallowance of expenses, deductions, and penalties.
Individuals and businesses must know the specific tax provisions that apply to cash transactions and plan their financial dealings accordingly to avoid penalties, disallowances, and increased tax liabilities. The Income Tax Department’s continued emphasis on reducing cash transactions will shape the future of the nation’s tax landscape, making it imperative for everyone to stay informed and compliant.