Cash Transactions Alert: 4 Major Income Tax Rules You Must Follow—or Risk Heavy Penalties

By Siddhi Jain | Updated: Jun 23, 2025, 18:40 IST

Cash remains a preferred mode of transaction for many in India, especially for personal and business dealings. However, the Income Tax Act has strict limits and rules in place regarding cash payments and receipts. Whether you're a business owner, professional, or individual, violating these rules could result in hefty fines. Here's a comprehensive breakdown of four major rules on cash transactions that you should absolutely know to avoid penalties.

1. Cash Payment Limit for Businesses and Professionals

If you are engaged in a business or profession, you cannot pay more than ₹10,000 in cash to a single person in a single day for any business-related expenditure.

If this rule is violated, the amount cannot be claimed as a deduction while calculating your taxable income.
Exception: Payments to transporters are allowed up to ₹35,000 per day in cash.
Additionally, if you purchase an asset and pay over ₹10,000 in cash, that payment won’t be included in the asset’s cost, and depreciation benefits will not apply.

2. Cash Limits on Loans and Repayments

As per the Income Tax Act, you cannot accept or repay loans or deposits in cash exceeding ₹20,000.

This limit applies not only to single transactions but also to the total outstanding amount.
Even if the cash repayment is just ₹1, if the outstanding loan is over ₹20,000, it's a violation.
Violators are subject to a penalty equal to the loan amount.
Exceptions apply to transactions involving banks, government bodies, and public sector entities. For instance, you can pay your home loan EMI in cash, even if it exceeds ₹20,000.

3. Cash Restrictions on Tax Deduction Claims

Certain tax deductions cannot be claimed if the payment is made in cash.

Section 80D (Health Insurance): No deduction is allowed if the premium is paid in cash.
- However, preventive health checkups of up to ₹5,000 are exempt from this restriction.
- Senior citizens without health insurance may claim deductions for cash-paid medical expenses, within allowed limits.
Section 80G (Donations): Donations over ₹2,000 made in cash are not eligible for deduction.
- This limit applies per donation, not on the cumulative total.

4. Strict Cap on Receiving Cash – Section 269ST

Under Section 269ST, no person can receive ₹2 lakh or more in cash, in the context of:

A single transaction
From a single person
On a single occasion (even if on different days)

This rule applies to various situations, including:

A caterer receiving wedding payments—cash receipts over ₹2 lakh from a single client are disallowed, even in parts.
Selling gold, land, or property—you cannot receive more than ₹2 lakh in cash for the transaction.
Gifts at weddings or from relatives—you cannot accept more than ₹2 lakh in cash from one person.

💡 Important: This rule applies only to the receiver of cash. The person giving the cash is not penalized.

Consequences of Violating These Rules

Violating any of the above rules can result in:

100% penalty equal to the amount received or paid in cash (wherever applicable).
Disallowance of deductions in business/professional income.
Scrutiny and audit triggers from the Income Tax Department.

Final Thoughts: Go Digital, Stay Compliant

With the government pushing for transparent and traceable transactions, the Income Tax Act is increasingly strict about cash usage. For both individuals and businesses, it's crucial to stay informed and ensure compliance. Adopting digital payments or banking channels not only helps avoid penalties but also builds financial credibility.