Cash Transaction Limits in India: All You Need to Know

In our everyday lives, we undertake numerous transactions in terms of money, both inwards and outwards. Even though the transactions need not be in the nature of “income”, the Income Tax Department keeps a close watch on high-value transactions and has some pre-set limits for transfer of money as ‘cash’.

In this article, we explore the limits laid down by the Income Tax Act and other laws implemented by the government to put an end to black money circulation, money laundering and tax evasion.

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Below is a comprehensive, humanized narrative incorporating and expanding upon the key insights and provisions highlighted by CMA Niranjan Swain, Senior General Manager (Finance), Odisha Power Generation Corporation Ltd. The aim is to provide a more accessible understanding of the cash transaction restrictions under Indian income tax law, why they exist, and how they impact various stakeholders.

In recent years, India has made steady progress toward building a less cash-intensive and more transparent economy. This shift isn’t happening overnight—rather, it’s a slow, deliberate process supported by a series of legal and regulatory measures. These measures are carefully designed to discourage the use of large cash payments, curb the flow of unaccounted money, and encourage the use of digital payment methods.

They form part of an overarching national vision: to improve tax compliance, rein in black money, and ensure fair play in the financial system.

Why the Restriction on Cash Transactions at All?

Historically, cash transactions made it easier for money to slip under the regulatory radar. Without a digital or banking paper trail, unaccounted money could readily circulate—fuelling corruption, tax evasion, and under-the-table deals. While black money might seem like an abstract concept, its effects are very real.

For one, it deprives the government of tax revenue that could otherwise fund infrastructure, healthcare, and education. It also tends to remain idle or locked up in low-priority assets like gold and jewelry, rather than being productively invested in business expansions, technology upgrades, or capacity building that could generate jobs and spur economic growth.

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Recognizing these pitfalls, the Indian government, guided by expert committees and the Supreme Court Special Investigation Team (SIT), introduced several provisions under the Income Tax Act. These rules act as financial guardrails, nudging businesses and individuals toward legitimate, recorded modes of payment. Over time, as more transactions flow through the banking system, it becomes simpler to track income, verify tax compliance, and ultimately lower the burden on honest taxpayers.

Legal Provisions and Their Real-World Impact

Political Funding

Political parties play a central role in India’s democratic framework. To ensure that their funding is above board, these entities can only maintain tax-exempt status if they follow certain rules: 

   - They must not accept donations of INR 2,000 or more in cash. 

   - They must maintain detailed financial records and have them audited. 

   - Their income tax returns must be filed on time. 

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Essentially, this encourages cleaner elections. Instead of clandestine suitcases of cash changing hands, parties are pushed toward transparent banking instruments, thus making it harder to hide questionable contributions.

Cash Transactions by Businesses

Imagine you run a small manufacturing unit. In the past, you might have paid large suppliers in cash—say INR 50,000—without leaving a proper trail. Today, payments above INR 10,000 made in cash (or INR 35,000 for transport operators) cannot be claimed as deductible expenses for tax purposes. This rule directly impacts how businesses operate. By encouraging transactions through account payee cheques, bank drafts, or electronic payments, it ensures expenses are traceable and genuine, making your tax calculations more transparent.

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Suppose you’re investing in new machinery. If you pay more than INR 10,000 in cash for this asset, that portion of the expenditure won’t be included in the machine’s “actual cost” for depreciation purposes. Similarly, if you were eligible for investment-linked deductions under Section 35AD, making large cash payments can nullify that benefit. The lesson? To maximize your legitimate tax deductions, you need to embrace digital or banking channels of payment, ensuring a clean, auditable trail.

Individual Impact

For individuals, the rules apply just as strongly. Tax deductions available under various sections come with conditions that the payment be made through a banking channel. For example, health insurance premiums paid in cash won’t get you the deduction under Section 80D. Likewise, donations to charitable trusts and political parties exceeding certain thresholds must not be in cash if you want to claim them under Section 80G. Contributions to scientific research (Section 80GGA) and political parties (Section 80GGB, 80GGC) follow similar logic. These rules serve a dual purpose: not only do they encourage transparency, but they also protect donors by ensuring that their contributions are properly recorded and recognized.

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Thinking of lending or borrowing a sizable sum from a friend or a relative in cash? The law says if the loan or deposit is INR 20,000 or more, it must not be taken or repaid in cash. Instead, use an account payee cheque, draft, or digital transfer. Violating this can trigger a penalty equal to the amount of the loan itself. Such stringent measures ensure that big loans and deposits don’t fly under the radar, making every rupee traceable.

Limits of Cash Receipts a Day and on a Transaction

One of the boldest moves has been to set a limit of INR 2 lakh on cash receipts, whether it’s from a single person in one day, related to a single transaction, or connected to one event. Exceed this, and you could face a penalty equivalent to the amount received. This rule, introduced in 2017, has had a profound impact on sectors like real estate and luxury retail, where large cash deals were once common. By pushing such transactions into the banking system, it’s harder to hide money from tax authorities.

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Beyond penalties, the government offers carrots along with sticks. Consider Section 44AD, which outlines a presumptive taxation scheme for small businesses. If you operate within the small-business turnover thresholds, showing a minimum percentage of profit is easier if your transactions are digital. In fact, the profit rate considered for taxation can be reduced from 8% to 6% for revenues received through digital modes—an incentive that encourages you to embrace online banking, card payments, or UPI.

It is important to remember that these provisions aren’t designed solely to burden the taxpayer. On the contrary, as more money passes through official channels, the government can accurately assess its tax base. Over time, increased compliance can lead to a broader tax net and more revenue for public welfare, potentially enabling future tax cuts or incentives that benefit honest taxpayers.

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The final outcome that the government hopes for, is a more equitable financial system. One where honest citizens—be they salaried employees, small merchants, or large corporations—aren’t overshadowed by those skirting the rules. By encouraging proper documentation, transparent dealings, and a digital money trail, India sets the stage for sustainable economic growth.

Endnote

In the end, these cash transaction restrictions, while sometimes inconvenient, serve a greater purpose. They push the economy toward transparency, ensure that every rupee of taxable income is accounted for, and help foster a culture of integrity—one in which everyone contributes fairly and reaps the benefits of a stable, thriving nation.

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