Cash Expenditure Limits

Under the Income Tax Act, 2025

(Replacing the Income Tax Act, 1961 — Effective from New Framework)

1.  Business Expenses — Section 36(3)

Formerly: Section 40A(3) of the Income Tax Act, 1961

Payment or aggregate of payments exceeding ₹10,000 in cash to a single person in a single day is not allowed as a business deduction.

•        For payments to transport operators (plying, hiring, or leasing goods carriages), the cash limit is ₹35,000 instead of ₹10,000.

•        Where a taxpayer claimed a deduction in an earlier year and subsequently makes the cash payment exceeding ₹10,000, that payment is deemed to be business income of the year in which it is made.

2.  Cash Receipts — Section 186

Formerly: Section 269ST of the Income Tax Act, 1961

No person can accept cash exceeding ₹2,00,000 in the following circumstances:

•        From a single person in a day

•        For a single transaction

•        For transactions relating to one event or occasion

Penalty: An amount equal to the sum received in cash may be levied as a penalty under Section 451.

3.  Loans & Deposits — Section 185

Formerly: Section 269SS of the Income Tax Act, 1961

Section 185 prohibits accepting loans, deposits, or specified sums in cash when the current transaction, the unpaid balance of prior transactions with the same person, or their aggregate reaches ₹20,000 or more.

Permitted modes of receipt include:

•        Account payee cheque

•        Account payee bank draft

•        Electronic clearing through a bank account

•        Other prescribed electronic modes (NEFT, RTGS, UPI, IMPS, etc.)

Penalty: 100% of the loan/deposit amount accepted in cash (under Clause 450).

4.  Repayment of Loans — Section 188

Formerly: Section 269T of the Income Tax Act, 1961

No person can repay a loan or deposit of ₹20,000 or more in cash. All such transactions must be made through:

•        Account payee cheque

•        Account payee bank draft

•        Electronic clearing system (NEFT, RTGS, UPI, etc.)

Penalty: 100% of the amount repaid in cash.

5.  Asset Purchase — Section 39

Formerly: Section 43(1) of the Income Tax Act, 1961

If payment of more than ₹10,000 is made in cash for the acquisition of an asset, the expenditure is ignored for determining the actual cost of the asset — directly reducing the depreciation benefits claimable by the taxpayer.

6.  Health Insurance Premium — Section 126

Formerly: Section 80D of the Income Tax Act, 1961

A taxpayer can claim a deduction for Health Insurance premiums under Section 126 of the IT Act 2025. However, if the premium is paid in cash, no deduction can be claimed — regardless of the amount.

Consequence: Deduction denied on any cash payment of health insurance premium.

7.  Donations — Section 133

Formerly: Section 80G of the Income Tax Act, 1961

Donations above ₹2,000 made in cash are not eligible for income tax deduction. Donors must contribute via cheque, bank draft, or digital means to claim deduction benefits.

Consequence: Deduction denied for cash donations exceeding ₹2,000.

Quick Reference Summary

✅  Best Practice

Always use UPI, NEFT, RTGS, account payee cheque, or bank draft for payments to remain fully tax-compliant and avoid heavy penalties. The Income Tax Act 2025 strongly discourages cash transactions to promote a digital economy and ensure an audit trail.