When to say no to cash

The rules for cash trans­ac­tions are strin­gent. En­sure that you stay within spec­i­fied lim­its


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 ~22 lakh, the buyer pro­posed to pay ~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 ~2 lakh. A per­son can­not ac­cept cash above ~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 ~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 ~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 ~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 ~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 ~20,000. Prop­erty trans­ac­tions: In case of an im­mov­able prop­erty, tax laws don’t al­low any trans­ac­tion in cash above ~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 ~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 ~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 ~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.

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