Cash Limits That Cause Disallowance or Penalty: ₹10,000 per Expense, ₹2 Lakh per Receipt
A business expense paid in cash above ₹10,000 to one person in a day (₹35,000 for transporters) is not deductible. Receiving ₹2 lakh or more in cash for one transaction, event or day from one person attracts a penalty equal to the amount. Cash loans or repayments of ₹20,000 or more are also penalised.
Many small businesses still run on cash for wages, transport, repairs and walk-in customers. The tax law does not ban cash, but it puts limits on it, and the penalties are steep. These rules carried over unchanged into the Income-tax Act, 2025.
The four rules
| Rule | Limit | What happens |
|---|---|---|
| Cash payment for a business expense | More than ₹10,000 to one person in one day (₹35,000 for payments to transporters) | The whole expense is not deductible |
| Cash receipt | ₹2 lakh or more from one person in a day, for one transaction, or for one event | Penalty equal to the amount received |
| Cash loan or deposit taken | ₹20,000 or more | Penalty equal to the amount |
| Cash repayment of a loan or deposit | ₹20,000 or more | Penalty equal to the amount |
How the limits are counted
- ✓Per person, per day for expenses. Splitting a ₹30,000 bill into three ₹10,000 payments on the same day does not help.
- ✓Per transaction or per event for receipts. Taking ₹1,50,000 in cash on Monday and ₹1,00,000 on Tuesday for the same sale is still ₹2,50,000 for one transaction.
- ✓UPI, cards, net banking and account-payee cheques are not cash. They are outside these limits.
A worked example
A Lucknow caterer has this week of cash transactions:
| Transaction | Amount | Problem? |
|---|---|---|
| Paid a vegetable supplier in cash | ₹18,000 in one day | Yes: ₹18,000 not deductible |
| Paid daily wages to six workers | ₹900 each | No: limit is per person |
| Received a wedding booking in cash | ₹2,40,000 for one event | Yes: penalty of up to ₹2,40,000 |
| Paid a truck owner for transport | ₹30,000 | No: within the ₹35,000 limit for transporters |
Habits that avoid trouble
- ✓Pay suppliers by UPI or bank transfer above ₹10,000. Keep cash for small expenses.
- ✓Put a note on large quotations: payments of ₹2 lakh or more must be by bank or UPI.
- ✓Never take or repay loans in cash, including from relatives or partners.
- ✓Record the mode of payment for every entry. Your tax auditor reports large cash payments.
- ✓Use a petty cash book with a daily limit and receipts.
Frequently asked questions
Are there exceptions?
Yes, for example payments in villages without bank facilities and some payments to banks or the government. They are narrow, so do not plan around them.
Does the receipt limit apply to my customer or me?
The penalty is on the person who receives the cash.
Are cash deposits into my own bank account affected?
Depositing your own cash in your bank account is not a receipt from another person. But banks report large cash deposits, and you should be able to show where the cash came from.
Sources
- ✓Restrictions on cash transactions of ₹2 lakh or more, TaxGuru
- ✓Cash transaction limits under income tax law, TaxGuru
- ✓Cash receipts and payments compliance guide, MAS LLP
This is a summary, not legal advice. Confirm with your chartered accountant before you rely on it.
Written by
Founder, Airwix Technologies (Sleet)
Vatsal Sutariya is the founder of Airwix Technologies in Ahmedabad, the company that builds Sleet: SleetHR for HR and payroll, and Sleet Accounting for GST billing and books. He writes about GST, invoicing, business tax and choosing software for Indian businesses, and checks each rule against the official notification before it is published.
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