Cash transaction limits under income tax: ₹10,000, ₹20,000 and ₹2 lakh rules explained

The Income Tax Act does not ban cash, but it makes cash expensive above a few clear lines: ₹10,000 of expense payments to one person in a day (Section 40A(3)), ₹20,000 for loans and deposits (269SS and 269T), and ₹2 lakh for any receipt from one person in a day, transaction or event (269ST). Crossing them costs you the deduction or a penalty equal to the full amount. Here is what each section says, what it costs, how cash sales sit with GST, and a set of working rules for a shop that still takes cash every day.

The four limits at a glance

"Cash" in all of these means anything other than an account payee cheque, account payee bank draft, electronic clearing system, or the prescribed electronic modes (UPI, cards, net banking, IMPS, NEFT, RTGS, BHIM and similar). A bearer cheque counts as cash. A UPI transfer does not.

Section 40A(3): the ₹10,000 expense rule

If you pay any expenditure in cash to a single person in a single day and the total exceeds ₹10,000, the whole amount is disallowed when computing your business income. The test is per person per day, so splitting one ₹18,000 payment into two ₹9,000 payments on the same day to the same person still breaches it. Paying ₹9,000 today and ₹9,000 tomorrow does not.

The limit is ₹35,000 when the payment is to a transporter for plying, hiring or leasing goods carriages, which is why truck freight in cash is still common. Section 40A(3A) extends the rule to a later year: if you booked an expense on credit and then paid it in cash above the limit in a following year, that amount is treated as income in the year of payment.

Rule 6DD lists exceptions where cash above ₹10,000 is still allowed: payments to the government, to banks, to a person in a village with no bank on that day, on a bank holiday or strike, to an agent who must pay cash on your behalf, to the producer of agricultural, dairy, poultry or fish products, salary to an employee posted temporarily somewhere without a bank account, and a few others. The exceptions are narrow. "The supplier insisted on cash" is not one of them.

Note also that the proviso to Section 43(1) removes cash payments above ₹10,000 per person per day from the "actual cost" of a capital asset, so a ₹60,000 machine bought in cash earns no depreciation. This applies whether or not you follow presumptive taxation, though under Section 44AD the disallowance question does not arise because expenses are not separately claimed.

Section 269ST: the ₹2 lakh receipt rule

Section 269ST prohibits any person from receiving ₹2,00,000 or more in cash:

• in aggregate from a person in a day;
• in respect of a single transaction; or
• in respect of transactions relating to one event or occasion from a person.

All three tests apply at once. A jeweller who takes ₹1,50,000 cash today and ₹1,50,000 cash next week for the same ₹3,00,000 necklace breaches the single-transaction test. A caterer who bills a wedding as four separate invoices of ₹1,20,000 each and collects all in cash breaches the single-event test. A retailer who sells ₹2,10,000 of goods to one customer across five separate bills in one day breaches the per-day test. The only clean way to take a large amount is through the bank.

The penalty under Section 271DA is a sum equal to the amount received, levied by the Joint Commissioner, unless the recipient proves good and sufficient reasons. The receiver is penalised, not the payer. This is a receipt rule for you as a seller, and a reason never to accept a large cash "advance" even from a trusted customer.

Government, banks, post office savings banks and co-operative banks are exempt as receivers. Section 269ST does not apply to transactions already covered by 269SS (loans and deposits have their own rule).

Sections 269SS and 269T: loans and deposits at ₹20,000

Section 269SS bars taking or accepting any loan, deposit or "specified sum" (an advance in relation to transfer of immovable property) of ₹20,000 or more in cash. The test includes the amount already outstanding: if you already owe a person ₹15,000 in cash loans, you cannot take even ₹5,000 more in cash from them. Section 269T bars repaying a loan or deposit of ₹20,000 or more (including interest) in cash.

Penalties under 271D and 271E equal the amount taken or repaid. There is an exception where both parties have only agricultural income and neither has taxable income, and for government, banks and notified entities. Family loans to fund the business are common and perfectly legal; they simply have to move through the bank. Document them with a simple loan letter stating the amount, date, interest (or none) and the bank reference, because unexplained credits in a business account attract questions under Section 68.

Section 269SU: mandatory digital acceptance above ₹50 crore

Any business whose turnover exceeded ₹50 crore in the previous year must provide the prescribed electronic payment modes: a RuPay debit card facility, UPI, and a UPI QR code (Rule 119AA). Failure attracts ₹5,000 per day under Section 271DB. Businesses dealing only with other businesses, with at least 95 percent of receipts in non-cash modes, have been exempted by circular. Most readers of this post are well below the threshold, but a growing trader should note the line.

Cash sales, GST and the paperwork they trigger

GST law itself does not limit cash sales. The interactions are elsewhere:

• PAN on large sales. Rule 114B of the Income Tax Rules requires the customer's PAN (or Form 60) on any sale or purchase of goods or services above ₹2,00,000 per transaction, in cash or otherwise. For jewellery and some categories the rules are stricter; check the current schedule.
• SFT reporting. Businesses liable to tax audit must report cash receipts above ₹2,00,000 for the sale of goods or services in Form 61A (Rule 114E). Banks report cash deposits aggregating ₹50 lakh or more a year in a current account, and PAN is required for cash deposits or withdrawals of ₹20 lakh or more a year across accounts.
• Paying GST in cash. Over-the-counter cash payment of GST at a bank is limited to ₹10,000 per challan per tax period (Rule 87). Larger liabilities go by net banking, NEFT/RTGS or UPI on the GST portal.
• Presumptive tax. Under Section 44AD, deemed profit is 8 percent of cash turnover but 6 percent of turnover received through banking channels or digital modes by the return due date. The enhanced ₹3 crore turnover limit also depends on cash receipts staying at 5 percent or below. Every rupee you move from cash to UPI reduces deemed income. See /blog/presumptive-taxation-44ad-44ada-guide.

Cash sales must still be invoiced like any other sale. GST does not care how you were paid; time of supply is the invoice or delivery date. A shop that issues a proper invoice for every cash sale and deposits cash regularly has nothing to fear from any of these rules.

Worked example: a Surat saree shop that still takes cash

Bhavna runs a saree showroom in Surat with turnover of about ₹1.8 crore, roughly 35 percent in cash. In one month:

Receipt 1. A family orders wedding sarees worth ₹2,60,000 and offers ₹1,30,000 cash today and ₹1,30,000 cash at delivery. This is one transaction, so Section 269ST is breached the moment the second instalment is taken in cash; the penalty would be ₹2,60,000. Bhavna takes ₹1,30,000 in cash today (she is under ₹2 lakh per day) and insists on UPI or bank transfer for the balance. She also collects the customer's PAN because the sale is above ₹2,00,000.

Receipt 2. A regular customer buys ₹1,90,000 of stock in cash across three bills in a day. Under ₹2,00,000 in aggregate, so allowed. Bhavna notes that if the same customer comes back the same day for another ₹15,000, the aggregate would cross the line, so the last bill must go on UPI.

Payment 1. She pays a tailor ₹14,000 in cash for a day's blouse stitching. Entire ₹14,000 disallowed under 40A(3). At her 30 percent marginal rate, the cash convenience cost her ₹4,200 in tax. Paying by UPI would have been free.

Payment 2. She pays a Rajkot transporter ₹28,000 cash for a consignment. Allowed, because the transporter limit is ₹35,000.

Payment 3. Her brother lends the business ₹3,00,000 to buy Diwali stock, handed over in cash. Section 269SS breached; penalty under 271D equals ₹3,00,000. She reverses this, returns the cash, and takes the loan by NEFT with a one-page loan letter.

Payment 4. She buys a new billing computer for ₹48,000 in cash. Under the 43(1) proviso, the ₹48,000 is excluded from the asset's cost and earns no depreciation. Paid by card, the full amount would have been depreciable.

The month's lesson: nothing Bhavna did was unusual for her trade, and three of six ordinary transactions carried a tax cost or a penalty. The fixes were all free.

Practical rules for a shop that still gets cash

1. Any single customer at or near ₹2 lakh goes to the bank. Set the internal limit at ₹1,50,000 to keep a margin for the per-day and per-event tests. Print "Payments of ₹2 lakh and above are accepted only by bank transfer or UPI" on your invoice and on a card at the counter.
2. No cash expense above ₹10,000 to one person in a day. Give staff a UPI-enabled business account or a prepaid card for purchases. Keep a signed expense voucher for every cash payment with the payee's name and date, so per-person-per-day totals are visible.
3. Loans move through the bank, always. Family, friends, angel money, deposits from staff: never in cash, never repaid in cash.
4. Issue a numbered cash receipt for every cash collection against a credit sale, and an invoice for every cash counter sale. Cash receipts with the customer's name are your evidence that the per-day and per-event tests were met.
5. Deposit cash daily or every second day. Large cash balances in the shop invite both theft and questions. A daily deposit slip matching the cash book is the simplest audit trail.
6. Collect PAN on sales above ₹2 lakh and keep Form 60 for customers without one.
7. Push UPI for everything. It removes every limit above, lowers deemed income under 44AD, and makes reconciliation easier; see /blog/upi-for-business-guide.

Common mistakes

• Splitting one payment across bills or days to stay under a limit; the transaction and event tests catch it.
• Assuming only the excess above ₹10,000 is disallowed under 40A(3); it is the whole payment.
• Treating a bearer cheque as non-cash. Only account payee instruments and electronic modes qualify.
• Taking an "advance" from a customer in cash that is really a deposit, which pulls in 269SS as well as 269ST.
• Paying salary above ₹10,000 in cash to one employee in a day; salary is expenditure under 40A(3) like anything else.
• Keeping no payee name on cash vouchers, so the assessing officer aggregates them against you.
• Buying assets in cash and then claiming depreciation.

The rules above change occasionally in the Finance Act; the thresholds given are as of FY 2026-27. Confirm the current figures with your CA before relying on them for a large transaction, and treat this as general information rather than advice on your specific case.

How VyaparKit helps

Every invoice and receipt you make in VyaparKit records the payment mode, so cash and digital receipts stay separately identifiable for the 44AD split and the 269ST checks. The cash receipt and payment receipt tools issue numbered receipts with the customer's name and date, and the expense voucher records the payee and mode for every cash expense so per-day totals are easy to review. Share links on every GST invoice carry a Pay-via-UPI button, which is the simplest way to move customers off cash.

Next steps

• Print the "₹2 lakh and above by bank only" line on invoices and at the counter.
• Give staff a UPI account for purchases and stop cash payments above ₹10,000 per payee per day.
• Move any outstanding cash loans onto the bank with a loan letter.
• Start daily cash deposits and match them to the cash book.
• Review last quarter's cash vouchers for any payee over ₹10,000 in a day and fix the habit that caused it.