Cash transactions that attracts Income Tax penalty

Last udpated: Dec. 27, 2018, 11:08 a.m.

Government is trying hard to reduce cash transactions. Income Tax Act is made super powerful to punish those involved in cash transactions above the prescribed limits.

If you love cash (everyone do), you must know about these 5 type of transactions. There are penalties on cash transactions, some penalties are directly and some in form of dis-allowances.

Earlier we have covered cash transactions and penalties in detail, this article will summarize the transactions that you should avoid.

Penalty on expenditure in cash above Rs. 10,000

If you are into business or profession, you should avoid incurring expenses in cash. Any cash expenditure amounting to more than Rs. 10,000 is disallowed.

There is no direct penalty, but you will not be able to avail expenditure benefits.

Income Tax is charged on profits. Profits are derived after deducting all expenses from income. However, expenditure incurred in cash for value more than Rs.10,000 is not allowed to be deducted. Indirectly it will form part of your profits.

For example, If you made sales of Rs. 5,00,000 and incurred expenditure of 2 lakhs. You will be paying tax on Rs. 3,00,000 (5 - 3), however if you incurred these 2 lakhs in cash in a single day, then you will be paying tax on entire 5 lakhs as 2 lakhs in cash will not be allowed as deduction.

Penalty on Rs. 2 lakhs or more received in cash

Income Tax provides a penalty equal to amount of cash received. If you receive cash of Rs. 2,00,000 or more from a single person in a single day or on multiple days for a single transaction, you may have to pay equal cash as penalty to income tax department.

Section 269ST of Income Tax Act, prohibits receiving remuneration in cash for Rs. 2,00,000 or more.

Penalty will be equal to amount of cash and further you will have to report these transaction on annual basis.

Health Insurance Premium paid in cash, no benefits

You will not be able to claim benefits of section 80D if you pay health insurance premium in cash. Section 80D gives benefits of deduction on health insurance premiums, however if you pay any health insurance premium in cash, you will lose the benefit.

It is advised to pay health insurance premium through banking channels only.

Penalty for cash payment on land and building

If you pay more than Rs. 20,000 in cash for transfer of immovable property, penalty equal to cash payment will be levied. Section 269SS of Income tax prohibits payment of more than Rs. 20,000.

This section not only prohibits full payment, but any amount paid whether it is advance, deposit or any other sum related to immovable property.

Payment in cash to registered trust or political party

You are not supposed to pay more than Rs. 2,000 to any registered trust or political party, otherwise you will not be able to claim benefits of section 80G.

Section 80G provides deductions on donations.

To claim deduction under 80G, you must not pay in cash for amount higher than Rs. 2000. This is with reference to donation to registered trust and political parties.

Intention of government is to promote cashless economy and it is making every effort to reduce cash transactions. Income tax act is highly weaponized with heavy penalties to demotivate cash transactions.

It is advised to avoid cash transaction or carry the transactions within prescribed limits to avoid heavy penalties and denial or benefits.

Posted by GST Payer under Income-Tax

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Comment by Srinivasa Murthy N S

In the example of 5 Lakhs minus 2 Lakhs expenses, you have added "in a single day" which raises a doubt whether it can be spread over a few days. Please clarify.

"To claim deduction under 80G, you must pay in cash for amount higher than Rs. 2000." Should it not be must not pay?

Comment by GST Payer

@Srinivasa Murthy Yes its in a single day or in multiple days but related to same transaction.

Second point is a typo will correct it.

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