Introduction: The ₹5 Lakh Penalty for a ₹2.5 Lakh Cash Receipt
Anil’s story (real case, name changed):
Anil runs a small electronics retail shop in Pune. Monthly turnover: ~₹15 lakhs.
One day in March 2024:
A corporate client walks in, wants to buy 10 laptops for office (₹2,50,000 total).
Client: “Can I pay cash? I’ll give you an extra ₹10,000 discount if you take cash.”
Anil thinks: “₹2.5L cash, plus ₹10K bonus… why not? It’s my shop, I can take cash.”
He accepts ₹2,50,000 cash, issues invoice, records in books.
Fast forward 8 months:
Income Tax Notice: Section 271DA — Penalty for violation of Section 269ST.
Department’s finding:
- Anil received ₹2,50,000 cash in single transaction (from one person, one day, one invoice)
- Limit: ₹2,00,000
- Violation: ₹50,000 excess
Penalty u/s 271DA: 100% of amount received = ₹2,50,000
Total financial impact:
- Penalty: ₹2,50,000
- Lawyer fees: ₹25,000
- Tax on unaccounted income (if dept suspects): ₹0 (income was accounted, but penalty still applies)
- Total loss: ₹2,75,000
For a ₹10,000 “extra discount,” Anil lost ₹2.75 lakhs.
How did Income Tax find out?
- Anil deposited the ₹2.5L cash in bank (next day)
- Bank’s SFT (Statement of Financial Transactions) auto-reported to Income Tax (cash deposit >₹10L annually triggers SFT)
- Income Tax cross-checked with Anil’s books
- Invoice showed ₹2.5L cash received from corporate client in one transaction
- Section 269ST violated
This happens to 1000+ businesses every month who:
❌ Don’t know Section 269ST exists
❌ Think “it’s my business, I can take cash”
❌ Assume “cash deposits are safe if I pay tax on income”
❌ Don’t understand cash RECEIPT limit ≠ cash DEPOSIT limit ≠ cash PAYMENT limit (three different rules!)
❌ Believe “small amounts are fine” (even ₹2,00,001 = violation)
❌ Split transactions thinking they’re being smart (dept sees through it)
The harsh reality:
Cash transactions are the #1 red flag for Income Tax, GST, and ED (Enforcement Directorate).
India’s cash monitoring in 2025 is hyper-advanced:
- 🤖 AI-driven pattern detection (sudden cash spikes, unusual deposits)
- 📊 PAN-Aadhaar linkage (all cash transactions linked to identity)
- 🏦 SFT auto-reporting (banks report high-value cash transactions)
- 🔗 GST-ITR cross-verification (cash sales vs. cash deposits vs. books)
- 📱 Digital payment tracking (high cash usage vs. UPI availability = suspicion)
One wrong cash transaction → Multi-year scrutiny → Penalties lakhs → Reputation damage.
This comprehensive guide covers:
- Section 269ST (cash receipt limit — ₹2 lakh rule)
- Section 269SS (cash loan/deposit limit — ₹20,000 rule)
- Section 40A(3) (cash payment limit — ₹10,000 rule)
- TDS on cash withdrawal (Section 194N)
- Bank cash deposit limits & SFT reporting
- Property transaction cash rules
- Salary payment in cash
- Business cash sales (what’s allowed, what’s not)
- Penalties summary (all sections)
- How govt tracks cash (2025 surveillance methods)
- Smart compliance practices (10 must-dos)
- Real case studies (violations & consequences)
1. Section 269ST — Cash Receipt Limit (The ₹2 Lakh Rule) 🚨
Most critical rule for businesses.
Legal Provision:
Section 269ST of Income Tax Act:
“No person shall receive an amount of two lakh rupees or more—
(a) in aggregate from a person in a day; or
(b) in respect of a single transaction; or
(c) in respect of transactions relating to one event or occasion from a person.”
Simple Explanation:
You CANNOT receive ₹2,00,000 or more in CASH:
✅ From one person in one day (aggregate)
✅ For one transaction (one invoice, one bill, one payment)
✅ For one event/occasion (even if multiple invoices, if related to same event)
Key Terms Defined:
“Cash” includes:
- Physical currency (notes, coins)
- Demand drafts, pay orders, banker’s cheques (if payable to bearer)
“Cash” does NOT include:
- Bank transfer (NEFT, RTGS, IMPS)
- Account payee cheques
- Digital payments (UPI, credit/debit card)
Examples — What’s Allowed / Not Allowed:
✅ Example 1: Allowed
Transaction: Customer pays ₹1,80,000 cash for furniture.
Status: Allowed (below ₹2L limit).
❌ Example 2: NOT Allowed (Single Transaction)
Transaction: Customer pays ₹2,50,000 cash for jewellery (one invoice).
Violation: Section 269ST (single transaction >₹2L).
Penalty: ₹2,50,000 (100% of amount).
❌ Example 3: NOT Allowed (Aggregate in One Day)
Transaction 1: Customer pays ₹1,20,000 cash at 10 AM.
Transaction 2: Same customer pays ₹1,00,000 cash at 4 PM.
Total: ₹2,20,000 (same day, same person).
Violation: Section 269ST (aggregate >₹2L in one day).
Penalty: ₹2,20,000.
❌ Example 4: NOT Allowed (One Event/Occasion)
Event: Wedding catering order.
Advance (15 days before): ₹1,00,000 cash.
Balance (on wedding day): ₹1,20,000 cash.
Total: ₹2,20,000 (related to same event—wedding).
Violation: Section 269ST (one occasion >₹2L).
Penalty: ₹2,20,000.
❌ Example 5: NOT Allowed (Splitting to Evade)
Smart (?) attempt:
Customer wants to pay ₹3,00,000 for machinery.
You create two invoices:
- Invoice 1: ₹1,50,000 (cash)
- Invoice 2: ₹1,50,000 (cash)
Department’s view: Both invoices for same machine (one transaction) → Splitting to evade 269ST → Penalty ₹3,00,000 + possible prosecution.
Exceptions (When ₹2L+ Cash Allowed):
Very few exceptions:
Exception 1: Government receipts (rare for businesses)
Exception 2: Banks/post offices/cooperative banks receiving deposits (not applicable to businesses)
For 99.99% businesses: No exception. ₹2L cash limit is absolute.
Penalty (Section 271DA):
Penalty = 100% of the amount received in cash.
Examples:
- Received ₹2,50,000 cash → Penalty: ₹2,50,000
- Received ₹5,00,000 cash → Penalty: ₹5,00,000
No reduction, no appeal on penalty quantum (only on whether violation occurred).
Critical Notes:
⚠️ Even ₹2,00,001 = Violation (not ₹2,00,000 or below—it’s ₹2L or MORE)
⚠️ Penalty is IN ADDITION to tax on income (you still pay income tax + penalty)
⚠️ Penalty not tax-deductible (can’t claim as business expense)
⚠️ Criminal prosecution possible (if amount very high, willful violation)
2. Section 269SS — Cash Loan/Deposit Limit (The ₹20,000 Rule)
For loans, deposits, advances given TO you.
Legal Provision:
Section 269SS:
“No person shall take or accept from any other person, any loan or deposit of an amount of twenty thousand rupees or more otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account.”
Simple Explanation:
You CANNOT accept:
❌ Loans ≥₹20,000 in cash (from anyone—friends, family, directors, partners, employees)
❌ Deposits ≥₹20,000 in cash (any kind of deposit to your business)
❌ Advances ≥₹20,000 in cash (for contracts, services, goods)
Must be by:
- Account payee cheque
- Bank transfer
- Electronic clearing (NEFT, RTGS, UPI)
Examples:
❌ Example 1: NOT Allowed (Personal Loan)
Your friend gives you personal loan of ₹50,000 in cash.
Violation: Section 269SS.
Penalty: ₹50,000.
Correct way: Friend transfers ₹50,000 to your bank account → Then you withdraw cash if needed.
❌ Example 2: NOT Allowed (Director’s Loan to Company)
Director gives ₹2,00,000 cash to company (as unsecured loan).
Violation: Section 269SS.
Penalty: ₹2,00,000.
Correct way: Director transfers from personal account to company account.
❌ Example 3: NOT Allowed (Advance for Contract)
Client gives you ₹1,00,000 cash as advance for interior work.
Two violations:
- Section 269ST (you received >₹2L if total contract >₹2L)
- Section 269SS (if it’s treated as deposit/advance >₹20K)
Penalty: Up to ₹1,00,000 (or more depending on structure).
Penalty (Section 271D):
Penalty = 100% of loan/deposit accepted.
Key Differences (269ST vs. 269SS):
| Aspect | Section 269ST | Section 269SS |
|---|---|---|
| Limit | ₹2,00,000 | ₹20,000 |
| Applies to | Any receipt (sales, fees, etc.) | Loans, deposits only |
| Penalty section | 271DA | 271D |
| Introduced | 2017 (Budget) | 1984 (older rule) |
3. Section 40A(3) — Cash Payment Limit (The ₹10,000 Rule)
For expenses YOU pay in cash.
Legal Provision:
Section 40A(3):
“Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure.”
Simple Explanation:
If you pay ≥₹10,000 cash for business expense:
- Expense disallowed in Income Tax calculation
- Your taxable income increases
- You pay MORE tax
Examples:
❌ Example 1: Cash Payment to Vendor
You buy ₹15,000 worth of materials from vendor (cash payment).
Tax impact:
- Expense claimed: ₹15,000
- Disallowed u/s 40A(3): ₹15,000
- Your profit increases by ₹15,000
- Additional tax @30%: ₹4,500
You saved ₹0 by paying cash (vendor may have given small discount), but paid ₹4,500 extra tax.
❌ Example 2: Salary in Cash
You pay employee salary ₹12,000/month in cash.
Tax impact:
- ₹12,000 disallowed (>₹10K cash payment)
- Annual: ₹12,000 × 12 = ₹1,44,000 disallowed
- Additional tax @30%: ₹43,200
✅ Example 3: Allowed
You pay ₹8,000 cash to contractor (below ₹10K).
Status: Allowed. Expense deductible.
Exceptions to ₹10,000 Limit:
Payments allowed in cash (even if >₹10K) in these cases:
Exception 1: Payment to transport operators (goods/passenger transport)—special rule (higher limit ₹35,000 applies)
Exception 2: Payments in areas where banking facilities not available (rare; must prove)
Exception 3: Payments for certain agricultural produce (from farmers—specific conditions)
For most businesses: No exception. ₹10K is the hard limit.
Practical Impact:
Disallowance = Higher taxable income = More tax.
Example calculation:
Scenario: You run a shop. Total expenses: ₹50 lakhs.
Out of this, ₹3 lakhs paid in cash (various expenses >₹10K each).
Tax calculation:
| Item | Amount |
|---|---|
| Revenue | ₹80,00,000 |
| Less: Expenses (total) | ₹50,00,000 |
| Profit (as per books) | ₹30,00,000 |
| Add: Disallowance u/s 40A(3) | ₹3,00,000 |
| Taxable income | ₹33,00,000 |
| Tax @30% | ₹9,90,000 |
| If 40A(3) not applied: | ₹9,00,000 |
| Extra tax paid due to cash payments: | ₹90,000 |
Lesson: Cash payments >₹10K are expensive (due to tax disallowance).
4. TDS on Cash Withdrawal (Section 194N)
New rule (from FY 2019-20 onwards).
Legal Provision:
Section 194N:
Banks must deduct TDS when you withdraw cash (if withdrawal exceeds thresholds).
TDS Rates & Thresholds:
| Scenario | Threshold | TDS Rate |
|---|---|---|
| Individual/HUF who filed ITR | Cash withdrawal >₹1 crore/year | 2% (on amount >₹1Cr) |
| Individual/HUF who did NOT file ITR (for last 3 years) | Cash withdrawal >₹20 lakhs/year | 2% (on amount >₹20L) |
| Individual/HUF (non-filer) + >₹1Cr | >₹1 crore | 5% (on amount >₹1Cr) |
Examples:
Example 1: ITR Filer (Regular)
You filed ITR for last 3 years.
Withdraw ₹1.2 crores cash in FY 2024-25.
TDS: 2% on (₹1.2Cr – ₹1Cr) = 2% of ₹20L = ₹40,000 TDS deducted.
Example 2: Non-Filer
You did NOT file ITR for last 3 years.
Withdraw ₹50 lakhs cash.
TDS: 2% on (₹50L – ₹20L) = 2% of ₹30L = ₹60,000 TDS.
Example 3: Non-Filer + High Withdrawal
You didn’t file ITR.
Withdraw ₹1.5 crores cash.
TDS: 5% on (₹1.5Cr – ₹1Cr) = 5% of ₹50L = ₹2,50,000 TDS.
Key Points:
✅ TDS is advance tax (adjustable in ITR—not a penalty, but still cash outflow)
✅ Applies to current accounts too (not just savings)
✅ Co-operative banks also covered
✅ Separate threshold for each bank (₹1Cr from Bank A + ₹1Cr from Bank B = ₹2Cr total, but TDS triggered separately per bank—debated, but generally per-bank tracking)
Practical tip: If you need to withdraw large cash, better to withdraw ₹99 lakhs (below threshold) to avoid TDS hassle.
5. Bank Cash Deposit Limits & SFT Reporting
No legal “limit” on deposits, but reporting triggers surveillance.
SFT (Statement of Financial Transactions):
Banks must report to Income Tax:
| Transaction Type | Reporting Threshold (per FY) |
|---|---|
| Cash deposits in savings account | ≥₹10 lakhs |
| Cash deposits in current account | ≥₹10 lakhs |
| One-time cash deposit (single day) | ≥₹10 lakhs (immediate alert) |
| Cash receipts for property sale/purchase | ≥₹30 lakhs (reported by registrar too) |
| Credit card payment in cash | ≥₹1 lakh (reported) |
| Foreign currency exchange | ≥₹10 lakhs |
What Happens When SFT Triggers?
Step 1: Bank files SFT with Income Tax Dept (annually, by May 31).
Step 2: Data appears in your AIS (Annual Information Statement).
Step 3: Income Tax cross-checks:
- Your ITR (income declared)
- Cash deposits in AIS
- Source of cash?
If mismatch: Notice u/s 142(1) or 148 (reassessment) → “Explain source of ₹15L cash deposited. If not explained, it’s treated as unexplained income.”
Unexplained Cash = Section 69A:
If you can’t explain source of cash:
Taxed @60% (Section 115BBE) + 25% surcharge = Effective ~75% tax + cess.
Plus: Penalty possible (50-200% of tax).
Example:
Cash deposited: ₹20,00,000
Explained in ITR: ₹8,00,000 (salary + business income)
Unexplained: ₹12,00,000
Tax @75%: ₹9,00,000
Penalty @50%: ₹4,50,000
Total: ₹13,50,000 (on ₹12L unexplained) = 112% of amount!
Common Legitimate Explanations (Accepted):
✅ Sale of assets (property, gold, vehicle—with bills, agreements)
✅ Loan received (via bank, loan agreement)
✅ Gift from family (gift deed, donor’s source)
✅ Business cash sales (recorded in books, GST returns match)
✅ Withdrawal from another account (circular—withdraw ₹10L from Bank A, deposit in Bank B—needs explanation why, but source is clear)
6. Property Transaction Cash Rules (Strict!)
Real estate transactions are under intense scrutiny.
Rules:
Section 269ST applies: Cannot receive ≥₹2 lakhs cash for property sale/purchase.
Even for:
- Token money
- Advance
- Installments (if total >₹2L)
- Final payment
Registration offices report: All transactions to Income Tax + GST (if GST applicable).
Examples:
❌ Example 1: Token Money in Cash
Property price: ₹50 lakhs.
Buyer gives ₹5 lakhs token money in cash.
Violation: Section 269ST (received >₹2L cash).
Penalty on seller: ₹5,00,000.
Penalty on buyer: ₹5,00,000 (separate provision—buyer also penalized for giving cash).
❌ Example 2: “Off-the-Books” Cash
Property registered at ₹50 lakhs (via cheque).
But actual deal: ₹70 lakhs (₹50L cheque + ₹20L cash—”black money”).
Risks:
- Seller: Section 69A (unexplained cash ₹20L) → Tax @75% = ₹15L + penalty
- Seller: Section 269ST violation (received ₹20L cash) → Penalty ₹20L
- Total on seller: ₹35L+ out of ₹20L extra received!
- Buyer: No deduction for ₹20L (only ₹50L registered price considered)
Safe Practice:
✅ All property transactions via bank only
✅ Register at actual price (no “under-valuation”)
✅ If taking advance, ensure <₹2L in cash (or better, bank transfer)
7. Salary Payment in Cash (Section 40A(3) Applies)
Paying salary in cash is allowed, but tax-inefficient.
Rules:
If salary >₹10,000/month paid in cash:
Expense disallowed u/s 40A(3).
Example:
Employee salary: ₹15,000/month (cash).
Disallowed annually: ₹15,000 × 12 = ₹1,80,000.
Extra tax @30%: ₹54,000.
Plus: You still need to deduct TDS on salary (if applicable) → Without bank, how to pay TDS to govt? (Complicated.)
Safe Practice:
✅ Pay salary by bank transfer (even ₹5,000—create audit trail)
✅ Exempt from 40A(3) disallowance
✅ TDS compliance easier (deduct from bank payment, deposit to govt)
✅ Provident Fund (PF) deduction easier
8. Business Cash Sales — What’s Allowed / Not Allowed
Cash sales ARE allowed (within limits).
✅ What’s Allowed:
Scenario: You run a retail shop (groceries, electronics, garments, etc.).
You CAN:
- Accept cash from customers for purchases
- Issue proper bills/invoices (with GST if registered)
- Record in books (day book, cash book, sales register)
Condition: Each sale <₹2 lakhs.
❌ What’s NOT Allowed:
Scenario 1: Single customer buys ₹2.5L worth of goods (cash).
Violation: Section 269ST.
Scenario 2: You create multiple fake bills to show sales (₹1.8L × 10 bills = ₹18L “cash sales”), but actual sales are much lower.
Risk: GST/Income Tax scrutiny (inflated sales to show higher income—possible tax evasion, or money laundering investigation).
Scenario 3: You accept ₹5L cash, but issue invoice for only ₹3L (₹2L “off the books”).
Risk: Unexplained cash (Section 69A) + Suppression of turnover (GST penalty) + 269ST violation.
Red Flags for Cash Sales:
🚩 Very high cash sales vs. digital payments (even small shops now have 50%+ UPI—if your shop shows 90% cash, dept suspects suppression of digital income OR cash inflation)
🚩 Cash sales not matching inventory (bought ₹50L inventory, sold ₹80L—but cash sales shown ₹1Cr → Where’s extra inventory from?)
🚩 Cash sales increasing year-on-year, but profit decreasing (suspicious—usually sales ↑ = profit ↑)
🚩 Large cash deposits in bank, but no corresponding sales invoices
Safe Practices:
✅ Encourage UPI/card payments (QR code display—90% customers will pay digitally if easy)
✅ Maintain daily cash book (opening balance + sales + expenses = closing balance; count cash daily)
✅ Reconcile monthly (cash sales in books = cash deposited in bank + cash expenses + closing cash in hand)
✅ Keep closing cash-in-hand reasonable (₹50,000 for ₹10L/month turnover shop = reasonable; ₹5L cash in hand = suspicious)
9. Penalties Summary (All Sections)
| Section | Violation | Limit | Penalty | Penalty Section |
|---|---|---|---|---|
| 269ST | Cash receipt | ≥₹2,00,000 | 100% of amount | 271DA |
| 269SS | Cash loan/deposit | ≥₹20,000 | 100% of amount | 271D |
| 40A(3) | Cash payment (expense) | >₹10,000 | Expense disallowed (indirect tax increase) | N/A (disallowance provision) |
| 194N | Cash withdrawal (high) | >₹1 crore (filer) / >₹20L (non-filer) | TDS 2-5% | N/A (TDS provision) |
| 69A | Unexplained cash (source not proved) | Any amount | Tax @60-78% + penalty 50-200% | 271AAC / 115BBE |
| 271A | Books not maintained | N/A | ₹25,000 | 271A |
Additional Consequences:
Beyond penalties:
- 🚨 Prosecution (if evasion >₹25 lakhs or willful violation)
- 🚨 Reassessment (up to 10 years back if fraud)
- 🚨 GST anti-evasion (parallel investigation)
- 🚨 PMLA (Money Laundering) investigation (if amounts very high, unexplained)
- 🚨 Reputation damage (for businesses seeking funding, loans, partnerships)
10. How Govt Tracks Cash Transactions (2025 Surveillance)
India’s cash monitoring is now AI-driven.
Mechanism 1: SFT (Statement of Financial Transactions)
Who reports:
- Banks (cash deposits, withdrawals)
- Credit card companies
- Mutual fund companies (high-value transactions)
- Stock brokers
- Registrars (property)
Threshold: ₹10L+ transactions (cash).
Reported to: Income Tax Dept annually.
Your AIS shows: All SFT data (you can see what govt sees).
Mechanism 2: PAN-Aadhaar Linkage
Every cash transaction >₹50,000 (deposit/withdrawal/property) requires PAN.
PAN linked to Aadhaar → Unique identity.
Govt can track: All cash movements by any individual across all banks, locations.
Mechanism 3: GST-ITR Cross-Verification
System compares:
- GST returns (sales, purchases)
- Income Tax returns (P&L, turnover)
- Bank deposits (SFT)
Mismatch triggers: Notice.
Example:
- GST turnover: ₹50L
- ITR turnover: ₹50L
- Bank deposits: ₹80L (cash)
- Dept asks: Where’s extra ₹30L from?
Mechanism 4: AI-Driven Anomaly Detection
Income Tax uses AI to detect:
🤖 Sudden cash spikes (normal ₹50K/month deposits → suddenly ₹10L in one month)
🤖 Round-figure cash deposits (₹5,00,000, ₹10,00,000 exactly—suggests structured deposits)
🤖 Multiple small deposits (to stay below ₹10L threshold—₹9.9L + ₹9.8L = ₹19.7L in one FY → Flagged)
🤖 Circular transactions (withdraw cash from Bank A → deposit in Bank B → withdraw from B → deposit in A—structuring?)
🤖 Cash deposits around year-end (March deposits to “use up” cash before FY ends)
Mechanism 5: Vendor-Customer Trail Comparison
If you show cash sales of ₹50L:
Dept checks your vendors (did you buy enough inventory to sell ₹50L?)
If you claim cash purchases of ₹30L:
Dept checks if your vendors filed GST showing sales to you.
Mismatch → Both parties scrutinized.
Mechanism 6: Lifestyle Analysis
If your ITR shows income ₹8L/year, but:
- You buy ₹60L property (cash + loan)
- You deposit ₹20L cash in banks
- You have credit card spends ₹15L/year
Dept asks: How did you fund this lifestyle on ₹8L income?
Result: Section 69A (unexplained expenditure) → Added to income → Taxed.
11. Smart Compliance Practices (10 Must-Do’s for Founders)
✅ Practice 1: Never Accept ₹2 Lakh+ Cash (Ever)
Even from best friend, loyal customer, trusted partner.
Polite response to customer: “Sir, we accept payments via UPI, card, or bank transfer for amounts above ₹2 lakhs. It’s for our tax compliance.”
If they insist: Split into multiple days (legally compliant) + different invoices for genuinely separate supplies (but NOT for same transaction split artificially).
✅ Practice 2: No Business Expenses >₹10,000 in Cash
Pay vendors by:
- Bank transfer (NEFT/RTGS)
- UPI
- Cheque
Even if vendor offers discount for cash: Calculate tax impact (disallowance u/s 40A(3) = 30% extra tax) → You’ll lose more than discount.
✅ Practice 3: Pay All Salaries by Bank
Benefits:
- No 40A(3) disallowance
- Easy TDS compliance
- Audit trail (for PF, ESI, audits)
- Protects employees (bank records = proof of salary)
Even for part-time, daily-wage workers: Create bank accounts (Jan Dhan accounts free), transfer salary.
✅ Practice 4: No Loans/Deposits >₹20,000 in Cash
If taking loan from family/friends:
- Must be via bank transfer
- Maintain loan agreement (signed, on stamp paper if high-value)
- Document source of lender’s funds (their bank statement, income proof—needed if questioned)
✅ Practice 5: Maintain Daily Cash Book
Simple format:
| Date | Opening Balance | Cash Sales | Cash Received (Other) | Cash Payments | Bank Deposit | Closing Balance |
|---|---|---|---|---|---|---|
| 01-Jan | ₹10,000 | ₹25,000 | ₹0 | ₹8,000 | ₹15,000 | ₹12,000 |
| 02-Jan | ₹12,000 | ₹30,000 | ₹5,000 | ₹10,000 | ₹20,000 | ₹17,000 |
Reconcile weekly: Physical cash count = Closing balance in book?
If mismatch: Investigate immediately (theft? unrecorded expense? error?).
✅ Practice 6: Reconcile Cash with Books Monthly
Month-end:
Opening cash (1st of month): A
Add: Cash sales: B
Add: Cash received (other): C
Total: A+B+C = D
Less: Cash expenses: E
Less: Cash deposited in bank: F
Expected closing cash: D-E-F = G
Actual cash counted: H
If G ≠ H: Investigate.
If G >> H (book shows ₹50K cash, actual ₹10K): Where did ₹40K go? Theft? Unrecorded withdrawal?
If H >> G (actual ₹80K, book shows ₹50K): Unrecorded income? (Tax issue!)
✅ Practice 7: Use Digital Payments Aggressively
Install QR code (Google Pay, PhonePe, Paytm—all give free QR codes).
Display prominently: “We accept UPI, cards, wallets.”
Benefit:
- 90% customers will pay digitally (if easy)
- Your cash receipts ↓ → Cash compliance risk ↓
- Audit trail automatic (digital payments auto-recorded in bank)
✅ Practice 8: Avoid Split Billing for Cash
Don’t:
- Create 2 bills of ₹1.5L each (for single ₹3L supply) to evade ₹2L limit
- Dept sees through this easily (same customer, same day, same product—obvious splitting)
Penalty: Not just on ₹1L excess (over ₹2L), but full ₹3L (entire transaction treated as violative).
✅ Practice 9: Avoid Large Cash Deposits at Year-End
Red flag: Depositing ₹5-10L cash in March (last month of FY).
Dept suspects:
- Hoarding cash all year → Deposit before FY end to “legitimize”
- Or sudden unexplained income
Better practice: Deposit cash regularly (weekly/monthly) as you receive it (daily sales → deposit every 2-3 days).
✅ Practice 10: Keep Closing Cash-in-Hand Reasonable
Rule of thumb:
| Monthly Turnover | Reasonable Cash-in-Hand |
|---|---|
| ₹5 lakhs | ₹20,000 – ₹50,000 |
| ₹20 lakhs | ₹50,000 – ₹1,50,000 |
| ₹50 lakhs | ₹1,00,000 – ₹3,00,000 |
If your books show:
Monthly turnover ₹10L, but closing cash ₹8L every month → Unreasonable (why hold so much cash? Security risk + tax risk).
Dept will ask: Is this actual cash, or are you inflating books?
12. Real Case Studies (Violations & Consequences)
Case Study A: Retail Electronics Shop (Section 269ST Violation) ❌
Profile: Electronics retailer, ₹2Cr annual turnover.
Violation:
Sold air conditioners to builder (bulk order): ₹4,50,000.
Builder paid cash (₹4.5L).
Seller’s thought: “It’s a big sale, why refuse cash?”
Consequences:
- Income Tax detected via SFT (₹4.5L cash deposited same day)
- Penalty u/s 271DA: ₹4,50,000
- Builder also penalized (separate rule—giver of cash >₹2L also penalized)
- Total: Both parties lost ₹9L (on ₹4.5L transaction)
Case Study B: Wedding Caterer (Section 269ST—”One Event” Violation) ❌
Profile: Catering business.
Event: Wedding catering contract: ₹5,00,000 total.
Payment structure:
- Advance (2 months before): ₹1,50,000 cash
- Balance (on wedding day): ₹3,50,000 (₹2L cash + ₹1.5L cheque)
Total cash: ₹3,50,000 (₹1.5L + ₹2L).
Violation: Section 269ST (transactions relating to one event—wedding—from one person).
Penalty: ₹3,50,000.
Lesson: Even spread over time, if it’s same event = violation.
Case Study C: Manufacturer (Section 40A(3) Disallowance) ❌
Profile: Small-scale garment manufacturer, ₹80L turnover.
Practice: Paid fabric suppliers in cash (₹5-20K per transaction, total ₹15L/year in cash).
Audit finding:
CA disallowed ₹15L expenses (all cash payments >₹10K).
Tax impact:
- Profit (before disallowance): ₹12L
- Add: Disallowance: ₹15L
- Taxable profit: ₹27L
- Tax @30%: ₹8.1L
- Tax if compliant (paid via bank): ₹3.6L
- Extra tax paid: ₹4.5L
Lesson: Cash payment “convenience” cost ₹4.5 lakhs.
Case Study D: Restaurant Owner (Unexplained Cash—Section 69A) ❌
Profile: Restaurant, ₹60L annual revenue (as per books).
Issue:
Deposited ₹25L cash in bank during FY.
ITR filed: Income ₹8L (after expenses, salary, etc.).
Dept’s question: “Your profit is ₹8L, but you deposited ₹25L cash. Where did ₹17L extra come from?”
Owner’s explanation: “Daily cash sales from restaurant, accumulated over year.”
Dept’s challenge:
- Your books show ₹60L sales (₹5L/month avg).
- You deposited ₹25L (₹2L/month).
- Your expenses (rent, salaries, purchases): ₹52L (mostly via bank).
- If you deposited ₹25L, that means all ₹60L revenue was cash (₹60L sales – ₹52L bank expenses = ₹8L profit, matches your ITR).
- But ₹25L deposited + ₹27L spent = ₹52L total cash available.
- So where did ₹52L cash come from? Your sales are only ₹60L (and ₹30L of that should be digital payments based on industry norms).
Conclusion: Dept treated ₹17L as unexplained cash (Section 69A).
Tax @75%: ₹12.75L + Penalty ₹6L = ₹18.75L (on ₹17L unexplained).
Lesson: Cash deposits must match revenue + have clear source trail.
Case Study E: Consultant (Smart Compliance) ✅
Profile: IT consultant, ₹40L annual revenue.
Practice:
- All client payments via bank (NEFT/UPI)
- All expenses via bank/card (even ₹500 taxi fare via UPI)
- Salary to assistant: ₹15K/month via bank
- Maintained digital records (invoices, receipts, bank statements—all in Google Drive)
Result:
- ✅ Zero cash compliance issues
- ✅ Clean ITR (no disallowances)
- ✅ Easy audit (showed laptop to auditor, all docs ready in 5 mins)
- ✅ When applied for home loan: Bank approved immediately (clean bank statements, tax compliance)
Lesson: Digital = Safe + Convenient + Loan-friendly.
13. Conclusion: Cash is Expensive (In 2025, Digital is Safer)
Key Takeaways:
- ✅ ₹2 lakh cash receipt limit (269ST) — Most critical; penalty 100%
- ✅ ₹20,000 cash loan/deposit limit (269SS) — Even from family; penalty 100%
- ✅ ₹10,000 cash payment limit (40A(3)) — Business expenses; disallowed if exceeded
- ✅ ₹1 crore cash withdrawal (194N) — TDS 2-5% applies
- ✅ Bank cash deposits >₹10L — SFT reported to Income Tax (triggers scrutiny)
- ✅ Unexplained cash = 75% tax + penalty (Section 69A/115BBE)
- ✅ Property transactions: Zero cash >₹2L (strictly)
- ✅ Salary, vendor payments: Via bank only (₹10K+ cash disallowed)
- ✅ Daily cash book + monthly reconciliation = Preventive compliance
- ✅ Digital payments = Audit trail = Safety (UPI/bank = future-proof)
What smart cash compliance gives you:
- ✅ Zero penalties (269ST, 269SS, 40A(3))
- ✅ Full expense deductions (no disallowances)
- ✅ Clean ITR (no unexplained cash additions)
- ✅ Easy audits (digital trail = proof)
- ✅ Loan eligibility (banks love clean statements)
- ✅ Peace of mind (no notices, no investigations)
What poor cash handling costs:
- ❌ Penalties (₹2L-10L+ per violation)
- ❌ Disallowed expenses (indirect 30% tax increase)
- ❌ Unexplained cash additions (75% tax + penalty = 110%+ of amount)
- ❌ Scrutiny (multi-year investigations, dept visits, stress)
- ❌ Prosecution risk (if high-value evasion)
- ❌ Business reputation damage (loan rejections, investor concerns)
Final word:
In 2025, cash is the most expensive payment method (due to compliance costs, penalties, scrutiny risks).
Digital is not just convenient—it’s economically smarter.
Golden rule: If it’s >₹10,000 (payment) or >₹20,000 (loan) or >₹2,00,000 (receipt) → NEVER use cash.
Remember: The govt can track every rupee. Compliance is not optional—it’s survival.
FAQs: Cash Transaction Rules India (30 Essential Questions)
Q1: What is the maximum cash I can receive in one transaction?
A: ₹1,99,999 (just below ₹2 lakhs). Section 269ST prohibits receiving ₹2,00,000 or more in cash from one person (in a day / single transaction / one event). Penalty: 100% of amount received.
Q2: Can I receive ₹2 lakh cash if I issue proper GST invoice?
A: No. Even with GST invoice, ITR filing, proper books—Section 269ST violation = ₹2L penalty. Invoicing doesn’t exempt you. The law is absolute.
Q3: What if customer pays ₹1.5 lakh today and ₹1 lakh tomorrow?
A: Generally allowed (different days, below ₹2L each day). BUT: If both payments are for same event/occasion/single transaction, it may still violate 269ST. Example: Both payments for same wedding order = violation. Both payments for separate orders = OK.
Q4: Can I receive ₹3 lakh cash if I create two separate invoices?
A: No. This is artificial splitting to evade 269ST. If it’s essentially one transaction (same product, same time, same customer), dept treats it as one transaction → Penalty on full ₹3L.
Q5: What is the penalty under Section 269ST?
A: 100% of the cash amount received. Example: Received ₹2.5L cash → Penalty: ₹2.5L (total loss: ₹5L if you return money + pay penalty).
Q6: What is Section 269SS?
A: Prohibits accepting loans or deposits of ₹20,000 or more in cash. Must be via bank transfer/cheque. Penalty (Section 271D): 100% of amount.
Q7: Can I take ₹50,000 loan from my brother in cash?
A: No. Violates Section 269SS (loan ≥₹20K in cash prohibited). He must transfer to your bank account. Even from parents/siblings/spouse—same rule.
Q8: What is Section 40A(3)?
A: Disallows business expenses paid in cash if payment >₹10,000 per transaction. Result: Expense not deductible → Taxable income increases → You pay more tax.
Q9: Can I pay ₹15,000 salary in cash?
A: Technically yes, but tax-inefficient. ₹15K payment in cash → Expense disallowed u/s 40A(3) → You pay 30% tax on ₹15K = ₹4,500 extra tax. Better: Pay via bank (expense allowed, no extra tax).
Q10: What is the TDS on cash withdrawal from bank?
A: Section 194N:
- If you filed ITR (last 3 years): TDS 2% on withdrawal >₹1 crore/year
- If you did NOT file ITR: TDS 2% on withdrawal >₹20 lakhs/year
- Non-filer + >₹1Cr: TDS 5%
TDS is advance tax (adjustable in ITR).
Q11: Is there a limit on cash deposit in bank?
A: No legal limit. You can deposit any amount. BUT: Deposits ≥₹10 lakhs/year (cash) are reported to Income Tax via SFT. If source not explained → Treated as unexplained income → Tax @60-78%.
Q12: How much cash can I deposit without tax notice?
A: No “safe” amount. Even ₹10L deposit triggers SFT reporting. Key: Not deposit amount, but source explanation. If you can explain source (salary, business income, sale of asset, loan, gift—all documented), no issue. If can’t explain → Tax + penalty.
Q13: What is SFT reporting?
A: Statement of Financial Transactions. Banks report cash deposits/withdrawals ≥₹10L/year to Income Tax. Appears in your AIS. Dept cross-checks with your ITR.
Q14: What happens if I deposit ₹20 lakh cash but my ITR shows ₹8 lakh income?
A: Dept issues notice: “Explain source of ₹20L cash.” If you can’t explain (with documents): ₹12L treated as unexplained income (Section 69A) → Tax @60% + 25% surcharge = ~75% = ₹9L tax + penalty ₹4.5L+ = Total ₹13.5L+ (more than the ₹12L itself!).
Q15: Can I withdraw ₹2 lakh cash from bank without issue?
A: Yes. ₹2L withdrawal = No TDS, no SFT reporting (threshold is ₹20L for non-filers, ₹1Cr for filers). But ensure you have source (salary credited, business income deposited—not unexplained balance).
Q16: Can I accept cash for property sale?
A: Maximum ₹1,99,999 (below ₹2L). For property sales >₹2L (99.99% cases), MUST be via bank/cheque. Even token money/advance >₹2L in cash = violation. Both buyer and seller penalized (₹2L+ each).
Q17: What if builder gives me ₹5 lakh cash as part of property deal?
A: Two violations:
- You (seller): Violated 269ST (received >₹2L cash) → Penalty ₹5L
- Builder (buyer): Violated separate provision (paid >₹2L cash for property) → Penalty ₹5L on him too
Both lose ₹5L each (₹10L total penalty on ₹5L transaction!).
Q18: Can I split property payment into multiple installments of ₹1.5 lakh cash each?
A: No. All payments related to one property transaction = one event → Aggregate >₹2L = violation (even if split over months).
Q19: Are there any exceptions to Section 269ST?
A: Very few:
- Government receipts (not applicable to businesses)
- Banks/post offices/co-operative banks accepting deposits
For 99.99% businesses: No exception. ₹2L cash limit is absolute.
Q20: Can I maintain books in cash and still be compliant?
A: Yes, BUT:
- Daily cash book mandatory (opening balance + receipts – payments = closing balance)
- Monthly reconciliation (physical cash count = book balance)
- All cash receipts/payments properly vouched
- Critical: Still subject to 269ST (receipt <₹2L), 269SS (loan <₹20K), 40A(3) (payment <₹10K)
Digital is safer (audit trail automatic, no disallowance risk).
Q21: What is Section 69A?
A: Unexplained money. If you have cash (in hand, deposited in bank, invested) and can’t explain source → Treated as your income → Tax @60% + 25% surcharge (~75%) + penalty.
Q22: How do I prove source of cash deposit?
A: Acceptable proofs:
- Salary slips + bank statements (showing salary credited, then withdrawn cash)
- Business cash sales (daily cash book, GST returns, customer invoices)
- Sale of asset (property sale deed, gold bill, vehicle sale receipt)
- Loan received (loan agreement, lender’s bank statement showing transfer)
- Gift (gift deed, donor’s source, relationship proof)
- Withdrawal from another account (Bank A to Bank B)
Without documents: Unexplained → Taxed.
Q23: Can I deposit cash in someone else’s bank account?
A: Yes, but risky.
- If amount >₹2L: You violated 269ST (gave cash >₹2L)
- They violated 269ST (received cash >₹2L)
- Both penalized
Plus: Dept suspects money laundering / benami transaction / tax evasion.
Safe: Transfer to your own account first, then transfer to their account digitally.
Q24: What if Income Tax says my cash is unexplained, but I have proof?
A: Submit proof via:
- Reply to notice (online, e-proceedings portal)
- Attach documents (bills, agreements, bank statements, ITR of payer/donor)
- Detailed explanation
If dept satisfied: Case closed.
If dept not satisfied: Assessment order passed (with addition) → You can appeal (CIT(A), ITAT, High Court).
Q25: Can I use demand draft or pay order instead of cash?
A: Yes, if account-payee. But No, if bearer instrument.
Section 269ST: “Cash” includes bearer instruments (demand draft/pay order/banker’s cheque payable to bearer).
Safe: Always use account-payee cheque or bank transfer (UPI, NEFT, RTGS).
Q26: What is the penalty for not maintaining books of accounts?
A: Section 271A: Penalty ₹25,000 (for failure to maintain books when required under Income Tax Act).
Plus: Dept can reject books (Section 145) → Estimate income arbitrarily (usually higher than actual) → You pay more tax.
Q27: Can I receive ₹1.8 lakh cash daily for 10 days (total ₹18 lakh)?
A: Yes (technically), IF:
- Each day <₹2L ✅
- Each receipt is from different person OR genuinely different transaction ✅
NO, IF:
- All ₹18L is from same person (spread over 10 days) BUT related to one event/contract → Violation (aggregate for one event >₹2L)
Risky area: Dept may scrutinize (looks like structured to evade).
Q28: How long should I keep cash transaction records?
A: Minimum 6 years (from end of relevant assessment year).
Example: For FY 2023-24 (AY 2024-25), keep records until March 31, 2031 (AY 2024-25 + 6 years).
For serious cases (fraud suspicion): Dept can go back 10 years.
Safe: Keep records 8-10 years (digital storage cheap—Google Drive, Dropbox).
Q29: What if customer refuses to pay via bank, insists on cash >₹2L?
A: Politely refuse.
Script: “Sir, as per Section 269ST of Income Tax Act, we cannot accept more than ₹2 lakhs cash. We accept UPI, card, bank transfer. It’s for our mutual tax compliance and your safety too (digital payment = proof, refund/warranty easier).”
If they insist: Walk away from deal (potential ₹2L+ penalty not worth it).
Contact AdvoFin Consulting to ensure your cash transactions are compliant, documented, and penalty-proof.
Disclaimer: This blog is for informational purposes only and does not constitute legal or tax advice. Cash transaction rules under Income Tax Act are subject to amendments, judicial interpretations, and case-specific facts. Penalties mentioned are statutory maximums and may vary based on adjudication. Every business situation is unique—what’s compliant for one may not be for another. Please consult a qualified Chartered Accountant or Tax Lawyer for personalized guidance on your specific cash transactions and compliance requirements. AdvoFin Consulting is not liable for actions taken based solely on this content.
