Recently, the Central Board of Direct Taxes (CBDT) issued an advisory on its website warning individuals to not accept cash above permissible limits. The present government has been lowering the threshold of cash transactions to reduce black money and promote cashless transactions.
Many continue to deal in cash due to lack of awareness. Take the example of Deepak Sahani. When selling his land valued at Rs 22 lakh, the buyer proposed to pay Rs 6 lakh in cash as advance. Sahani initially agreed. But his chartered accountant (CA) warned him that it’s above the permissible limits under the Income-Tax (I-T) laws and made him take the entire money through the banking channel.
Blanket ban: There’s a blanket ban on cash transactions above Rs 2 lakh. A person cannot accept cash above Rs 2 lakh even from close relatives like parents or partner in a single day. Other than the daily limit, an individual cannot pay or receive cash above the permissible limit for the same transaction. Say, an individual is buying an expensive watch worth Rs 3 lakh. He cannot spread the payment over two-three days for the same transaction.
Some leeway is given during a family wedding if purchases are made from different jewellery shops. As long as the bill in each shop is below Rs 2 lakh, payment can be made in cash. If the receiver violates the limit, the tax authorities will levy a penalty equal to the transaction amount.
Giving loans and repayment: I-T rules limit cash transactions in loans upto Rs 20,000. Restrictions apply on giving a loan as well as on repayment. Say, a person needs to borrow money urgently from a friend. He cannot take a loan of more than Rs 20,000 in cash. The loan has to be given through the banking channel. Same rules apply for loan repayment. The borrower cannot repay in cash if the loan is above Rs 20,000.
Property transactions: In case of an immovable property, tax laws don’t allow any transaction in cash above Rs 20,000. Even if you are taking an advance, the cash limit remains the same. While the cash limit for other transactions is kept at Rs 2 lakh, in case of immovable property it’s much lower. Tax experts say that property is one of the biggest sources of black money, and to discourage it, the government has a lower limit.
Business expenditures: The cash limit for business expenditures for each day and each transaction is capped at Rs 10,000. If a businessperson pays in cash above the threshold, he cannot claim it as an expenditure when filing income tax returns. “Many business owners were claiming tax deductions by showing expenditure in cash. The government wanted to restrict it and, hence, it lowered the limit,” says Preeti Khurana, a chartered accountant with ClearTax.com.
There are certain exceptions to this law, for instance, if the person who is receiving the payment doesn’t have a bank account. But the onus is on the businessperson to prove it. “Recently, there was a case in an I-T tribunal where a contractor used cash to meet the deadlines. If he had used cheque payment, he wouldn’t have met the deadline. The tribunal allowed the contractor to claim a deduction,” says Naveen Wadhwa, a chartered accountant with Taxmann.com.
Similarly, if a business owner buys an asset paying more than Rs 10,000 in cash, he cannot claim depreciation on it.
Tax saving instruments: When doing your tax planning, ensure that you don’t pay for health insurance in cash. The law doesnot allow the taxpayer to take benefit of Section 80D if he pays the insurance premium in cash. It has to be done mandatorily through the banking channel.
Onus is on the receiver:
In most transactions, the onus is on the receiver to not accept cash. It’s the receiver that has to pay the penalty, which is equivalent to the amount involved. Tax experts say that the responsibility has been put on the receiver as the person giving cash can deny any knowledge of it.
When Sahani was taking an advance for his property, he asked his CA whether taking the money in cash and depositing it in his bank account will also violate the law. “Yes, it will. The moment you accept the money in cash beyond the permissible limits, you are violating the law. Depositing it in the bank account later doesn’t help,” says Arvind Rao, founder of Arvind Rao & Associates.
In cases where the authorities can establish the person who paid the cash, the payer can also receive a tax notice. In the case of property transactions, for example, both buyer and seller mention the cash paid as advance in the agreement. In such cases, the I-T department can send notice to the buyer asking him to explain the source of funds for the cash. “If he is unable to explain the source, the assessing officer can initiate penalty proceedings against him,” says Wadhwa.