Cash Transaction Penalties Under 269SS, 269T and 269ST

Key Takeaways

• Rs 20,000 limit on loans and deposits: No person can accept or repay a loan, deposit, or specified sum of Rs 20,000 or more in cash (Section 269SS / Section 185 of Income Tax Act 2025). Penalty: 100% of the amount.
• Rs 2 lakh limit on all cash receipts: No person can receive Rs 2 lakh or more in cash from one person in a single day, a single transaction, or for a single event (Section 269ST / Section 186 of Income Tax Act 2025). Penalty: 100% of the amount.
• Rs 10,000 limit on business expenses: A cash payment exceeding Rs 10,000 in a day to one person is disallowed as a business deduction (Section 40A(3) / Section 36(4) of Income Tax Act 2025).
• Reasonable cause defence: Penalties under Sections 450, 451 and 453 of the Income Tax Act 2025 are not imposed if the taxpayer proves reasonable cause (Section 470 of the 2025 Act, formerly Section 273B).
• All three restrictions apply to the receiver or payer, not to the bank. Even family transactions are covered unless they fall within the exceptions listed below.

What are the cash transaction limits under the Income Tax Act? The Income Tax Act imposes three main cash limits: (1) Rs 20,000 for accepting or repaying any loan, deposit, or property advance (old Sections 269SS and 269T, now Sections 185 and 188 of the Income Tax Act 2025), (2) Rs 2,00,000 for receiving any cash from one person in a day, one transaction, or one event (old Section 269ST, now Section 186), and (3) Rs 10,000 for any single business expense payment in cash (Section 40A(3)). Violation of (1) or (2) triggers a penalty equal to 100% of the cash amount. Violation of (3) results in the entire payment being disallowed as a business deduction.

Indian income tax law restricts cash transactions at three separate thresholds. These rules apply to every person, not only businesses. The penalties are steep: the department can levy a penalty equal to 100% of the cash amount involved.

Most business owners know about the Rs 2 lakh cash limit. Fewer know that accepting a Rs 25,000 loan from a relative in cash also attracts 100% penalty, or that paying Rs 12,000 cash for a repair bill makes the entire amount non-deductible.

This guide covers each restriction, its exceptions, the penalty provisions, and how the rules map to the new Income Tax Act 2025 that took effect on April 1, 2026.

Section 269SS / Section 185: Rs 20,000 Limit on Accepting Loans and Deposits

Section 269SS of the Income Tax Act 1961 (now Section 185 of the Income Tax Act 2025) provides that no person shall accept from any other person any loan, deposit, or specified sum of Rs 20,000 or more except through:

• Account payee cheque
• Account payee bank draft
• Electronic clearing system (ECS) through a bank account
• Other prescribed electronic modes (UPI, NEFT, RTGS, IMPS)

The Rs 20,000 threshold applies to the aggregate. If you accepted Rs 15,000 in cash from a person earlier and still owe it, accepting another Rs 5,000 in cash from the same person triggers the provision because the aggregate outstanding is Rs 20,000.

"Specified sum" includes any advance received in connection with the transfer of an immovable property, whether or not it qualifies as earnest money.

Who does it apply to?

Every person. Individuals, firms, companies, HUFs, and trusts. There is no turnover exemption. A salaried individual who accepts a Rs 25,000 cash loan from a colleague is covered.

Exceptions

The rule does not apply to loans or deposits taken from or by the Government, a banking company, post office savings bank or co-operative bank, a statutory corporation, a Government company, or a notified institution. It also does not apply where both parties have only agricultural income and no taxable income (Section 185(2) and (3) of the 2025 Act).

For deposits accepted by, or loans taken from, a primary agricultural credit society or primary co-operative agricultural and rural development bank by its member, the limit is Rs 2,00,000 instead of Rs 20,000 (Section 185(4) of the 2025 Act; the same relief was added to Section 269SS by the Finance Act 2023).

Penalty: Section 271D / Section 450

If a person accepts a loan, deposit, or specified sum in violation of Section 269SS (Section 185), the Assessing Officer may impose a penalty equal to the entire cash amount accepted (Section 271D of the 1961 Act, Section 450 of the 2025 Act).

Example: A partnership firm accepts a Rs 50,000 loan in cash from a partner. The Assessing Officer issues a penalty notice of Rs 50,000, equal to the full amount.

Section 269T / Section 188: Rs 20,000 Limit on Repaying Loans and Deposits

Section 269T of the 1961 Act (now Section 188 of the 2025 Act) mirrors the acceptance rule for repayments. No person shall repay any loan, deposit, or specified advance of Rs 20,000 or more in cash.

The permitted modes are the same: account payee cheque, account payee bank draft, ECS, or prescribed electronic modes. The repayment cheque or draft must be drawn in the name of the person who made the original loan or deposit.

Penalty: Section 271E / Section 453

Penalty equals 100% of the cash amount repaid in violation. The Assessing Officer imposes the penalty (Section 271E of the 1961 Act, Section 453 of the 2025 Act).

Example: A company repays Rs 75,000 in cash to a director who had given an unsecured loan. The penalty is Rs 75,000.

Section 269ST / Section 186: Rs 2 Lakh Limit on Cash Receipts

Section 269ST (now Section 186 of the 2025 Act), effective from April 1, 2017, provides a broader cash restriction. No person shall receive a sum of Rs 2,00,000 or more in cash:

1. In aggregate from one person in a single day (even across multiple transactions)
2. In respect of a single transaction (even if received on different days)
3. In respect of transactions relating to one event or occasion from one person (for example, a wedding order)

This is the catch-all. Even if the money is not a loan or deposit, receiving Rs 2 lakh or more in cash from one person in a day is prohibited.

Who is covered?

Every person except:

• The Government (Central, State, or local authority)
• Any banking company, post office savings bank, or cooperative bank
• Transactions already covered by Section 269SS (loans and deposits have their own Rs 20,000 rule)
• Other persons or classes of receipts notified by the Central Government

Penalty: Section 271DA / Section 451

The receiver faces a penalty equal to 100% of the cash amount received. The penalty falls on the receiver, not the payer.

Example: A jeweller receives Rs 2,50,000 in cash from a customer for a single purchase. The jeweller faces a penalty of Rs 2,50,000 under Section 271DA (Section 451 of the 2025 Act).

The same limit applies to lenders collecting loan repayments in cash; our pawnbroker and gold loan shop guide works through it.

Section 40A(3): Rs 10,000 Limit on Business Expense Payments

This provision works differently from the three above. Section 40A(3) does not impose a penalty. Instead, it disallows the entire expenditure as a business deduction if the cash payment exceeds Rs 10,000 to a single person in a single day.

• Limit: Rs 10,000 per person per day
• Limit for transport operators (plying, hiring, or leasing goods carriages): Rs 35,000 per person per day
• Effect: The payment is added back to taxable income

Section 40A(3A) extends this to deferred payments. If an expense was claimed as a deduction in an earlier year but actually paid in cash exceeding Rs 10,000 in a later year, the amount is added back to income in the year of cash payment.

Exceptions under Rule 6DD

Cash payments exceeding Rs 10,000 are still allowed as deductions in these specific situations (Rule 6DD of the Income Tax Rules):

• Payment in a village or town not served by any bank, to a person who ordinarily resides or carries on business there
• Payment to the Government or payments required by law to be made in legal tender
• Payment on a day when banks were closed because of a holiday or strike
• Payment to a cultivator, grower, or producer for purchase of agricultural or forest produce, animal husbandry, dairy, poultry, fish, or similar products
• Payment for cottage industry products bought from the producer without the aid of power

Quick Reference: All Cash Limits in One Table

How to Defend Against a Cash Transaction Penalty

The Income Tax Act provides a reasonable cause defence. If you prove that there was a genuine and sufficient reason for the cash transaction, the penalty can be waived.

Under the 1961 Act, this defence is provided by Section 273B. Under the 2025 Act, it is Section 470, which covers the penalties under Sections 450, 451 and 453.

What counts as reasonable cause?

Tribunals and courts have, depending on the facts, accepted explanations such as:

• Business urgency: cash was used because banking channels were genuinely unavailable at the time and place of payment
• Bona fide belief: the transaction was genuine and properly recorded, and the taxpayer believed in good faith that banking channels were not required
• Payee insisted on cash: the lender demanded cash repayment and there was no practical alternative

Each case turns on its own evidence, so document the circumstances at the time of the transaction.

What does NOT count as reasonable cause?

• "I did not know the law" is generally not accepted as reasonable cause
• A transaction between related parties that was designed to avoid tax scrutiny
• Splitting a single transaction into multiple amounts below Rs 20,000 or Rs 2 lakh to circumvent the limits (the Assessing Officer can aggregate these)

Common Mistakes Businesses Make

1. Accepting cash advances for property deals: A builder accepts Rs 50,000 as an advance from a buyer in cash. This violates Section 269SS (specified sum), and the builder faces a Rs 50,000 penalty.

2. Splitting cash to stay below Rs 2 lakh: A retailer asks a customer to pay Rs 1.9 lakh today and Rs 1.9 lakh tomorrow for the same invoice. Since both payments relate to a single transaction, Section 269ST applies to the aggregate of Rs 3.8 lakh. The penalty is Rs 3.8 lakh.

3. Paying suppliers in cash above Rs 10,000: A restaurant pays Rs 15,000 in cash to a vegetable supplier. The entire Rs 15,000 is disallowed as a business deduction under Section 40A(3), unless the supplier is a direct cultivator (in which case Rule 6DD provides an exception).

4. Family loans in cash: A father lends Rs 1 lakh in cash to his son for a business emergency. Family relationships do not exempt the transaction from Section 269SS. The son faces a penalty of Rs 1 lakh.

Section Mapping: 1961 Act to 2025 Act

The Income Tax Act 2025 replaced the 1961 Act with effect from April 1, 2026. The cash transaction rules remain substantively the same; only the section numbers have changed.

For the complete old-to-new section mapping, see the Income Tax Act 2025 section mapping guide.

What Tax Garden Does for You

Cash transaction compliance is one of the most common sources of penalty notices for Indian businesses. Tax Garden reviews your cash receipts and payments against Sections 185, 186, and 188 when preparing your income tax return, flags transactions that cross the thresholds, and prepares documentation that establishes reasonable cause where applicable. If you have already received a penalty notice under Section 450 or 451, Tax Garden prepares and files the response with the Assessing Officer. Contact our team to get started.