Key Income Tax Rules on (Say No To) Cash Transactions (Part-2)

The Income Tax Department has issued guidelines on regulating cash transactions and encouraging taxpayers to move towards digital payments, through recently issued Part-2 of the ‘Say No to Cash Transactions’ brochure. It aims at formalizing the economy, preventing unaccounted money, and ensuring that tax laws are complied with. Here are the key provisions summarised for better understanding:

Provisions of Penal Nature

Donations to Political Parties

Under Sections 13A and 13B, political parties registered under the Representation of the People Act, 1951, cannot accept donations exceeding Rs 2,000 in cash. Electoral Trusts violating this limit lose tax exemptions.

Hundi Transactions

As per Section 69D, borrowing or repaying amounts on hundis in cash is deemed as income of the borrower or payer in the financial year of the transaction.

Restricting Cash Transactions

Disallowance of Expenses (Section 40A)

i) Payments exceeding Rs 10,000 in cash toward business expenses are not allowed as deductions.

ii) For goods carriage, the limit is Rs 35,000 per day.

iii) Payments for prior-year liabilities exceeding Rs 10,000 in cash will be deemed as income in the year of payment.

iv) Exceptions apply to payments made to cultivators for agricultural produce.

Depreciation Disallowance (Section 43)

Cash payments exceeding Rs 10,000 toward asset acquisition will not be included in the asset’s actual cost, and depreciation cannot be claimed.

Donations Under Chapter VI-A

i) Donations exceeding Rs 2,000 in cash under Section 80G are disallowed for deductions.

ii) For scientific research or rural development under Section 80GGA, the limit is also Rs 2,000.

iii) Contributions to political parties under Sections 80GGB and 80GGC must be made in non-cash modes to qualify for deductions.

iv) No deductions under section 80JJAA if payments are made in cash in respect of employment to new employees.

Incentives for Cashless Transactions

Lower Tax Rates for Digital Receipts (Section 44AD)

Businesses opting for cashless transactions benefit from a reduced presumptive tax rate of 6% instead of 8% on gross receipts or turnover.

Tax Audit Threshold (Section 44AB)

The tax audit threshold for businesses has been raised to Rs 10 crore if cash receipts and payments do not exceed 5% of total transactions.

Tax Deductibility and TDS Rules

TDS on Cash Withdrawals (Section 194N)

i) 2% TDS applies to cash withdrawals exceeding Rs 1 crore from banks, co-operative societies, or post offices.

ii) For non-filers of income tax returns, TDS applies at 2% on withdrawals between Rs 20 lakh and Rs 1 crore, and 5% beyond Rs 1 crore.

TDS on Contractual Payments (Section 194M)

Individuals or HUFs paying sums exceeding Rs 50 lakh in a year for contractual work or professional services must deduct 5% TDS, regardless of payment mode.

Mandatory Return Filing and Penalties

Seventh Proviso to Section 139(1)

Individuals or entities must file income tax returns if they:

i) Deposit Rs 1 crore or more in current accounts.

ii) Spend over Rs 2 lakh on foreign travel.

iii) Incur electricity expenses exceeding Rs 1 lakh annually.

Section 234F

A penalty of Rs 5,000 is levied for late filing of income tax returns.

Key Exceptions

i) Rule 6DD exempts certain cash payments, such as purchases of agricultural produce from cultivators, from restrictions under Section 40A.

ii) Preventive health check-ups under Section 80D are allowed in cash, although premiums must be paid digitally.

This brochure (part-2) explains the importance of reducing cash transactions to ensure tax compliance and avoid penalties. Understanding these guidelines from Income Tax Department can help taxpayers make informed financial decisions while aligning with tax compliance requirements.

Source: Say No to Cash Transactions (part-2), (part-1)