Updated on: Feb 2nd, 2022
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5 min read
Income Tax law provides for permissible cash expenses as deductible expenses for cash payments exceeding Rs 10,000 in a single day i.e. payment is made otherwise than by electronic clearing system or an account payee check or an account payee bank draft won’t be permitted as a deductible expense.
The income tax law provides for deeming the payments as profits and gains from business or profession in case the expenditure of Rs 10,000 is incurred in any particular year, and the payment for such expenditure is made in cash in any subsequent year above Rs 10,000 in a single day.
This law was introduced by Finance Act 1968 which was designed for countering tax evasion through claims as expenditure incurred in cash with a view to infuriate investigation by Income Tax Department as to the identity of payee and reasonableness of such payment. The provisions of this law are attracted when the payment in excess of INR 10,000, is made at a time otherwise than an account-payee draft/ check.
However, where a number of cash payments are made to the same party within a single day, this limit of INR 10,000 is applicable to the aggregate value of the cash payments made to such party in the entire day. By necessitating the payments to be done through account payee instruments or electronic form, it’s possible to validate the authenticity of transactions thus mitigating the risk of tax evasion. However, there are certain exceptions to this law which listed below.
The following categories of payments exceeding INR 10,000 are permitted to be done through cash:
Income Tax law allows cash expenses over Rs 10,000 in a day only with specific conditions. Introduced in 1968 to counter tax evasion, this law deems payments as business profits if exceeding Rs 10,000. Exceptions for cash payments include certain government entities, specific payment modes, salary adjustments, cottage industries, remote areas without banks, and certain agent or foreign currency transactions.