Borrowing cash from friends or relatives may seem convenient, but it can attract hefty tax penalties if certain limits are breached. Under the income tax law, a person cannot accept or repay a loan or deposit of ₹20,000 or more in cash.
The restriction applies even when the transaction is between friends or family members, and violations can attract a penalty equal to the amount of the loan or repayment. For example, if a loan is accepted by an individual in the amount of ₹1 lakh, this penalty would also be in the amount of ₹1 lakh.
To avoid such scrutiny, any amount above the prescribed limit should be routed through banking channels, such account transfers, cheques, demand drafts, or other prescribed digital modes, according to Siddharth Maurya, Managing Director at Vibhavangal Anukulkara Pvt Ltd.
Both borrower and lender will be scrutinised
The expert also noted that both the borrower and lender will be scrutinised if the prescribed limit on lending cash is crossed. The lender will be questioned on the loan’s source and the transaction’s legitimacy, while, the borrower incurs the primary penalty liability.
One of the incorrect assumptions of most taxpayers is that cash borrowed from friends and relatives is exempt from these provisions. “However, Section 269SS, and the regulations in general, will apply, irrespective of the lender being a family member, friend, business associate, or any other person,” he said.
According to income tax rules, the restriction applies if:
- Amount of loan, deposit, or specified sum received from a depositor is ₹20,000 or more in a single transaction
- On the date of accepting the new amount, the outstanding balance of previous such sums from the same depositor is ₹20,000 or more
- Combined total of the new and earlier unpaid amounts from the same depositor is ₹20,000 or more.
How does ₹20,000 limit differ from ₹2 lakh limit on cash transactions
The ₹20,000 limit in Section 269SS concerns only loans and deposits. As such, it restricts a person from accepting loans or deposits of ₹20,000 or more in cash.
The ₹2 lakh limit in Section 269ST is much more expansive. It restricts a person from receiving ₹2 lakh or more in cash from any other person in a day, whether in a single transaction or in several transactions related to the same event or occasion.
“The provision could be triggered if a property seller, jeweler, consultant, trader, or any other recipient received ₹2 lakh or more in cash. Compared to Section 269SS, which covers only loans and deposits, Section 269ST has a wider scope and covers all kinds of receipts,” Maurya said.
The violation of Section 269ST also triggers a penalty. Since the penalty is imposed under Section 271DA on the recipient of the cash, it is important for both individuals and businesses to comply with the law.
How does the I-T department track cash transactions?
Cash transactions may be revealed in many ways, such as through income tax searches and surveys, analysis of bank deposits, property transactions, business audits, financial statements, details reported in the Annual Information Statements (AIS), and other reporting mechanisms, Maurya noted.
“Discrepancies may arise when one party records a loan in the books of accounts, income tax, or financial statements, and the counter party does not document the loan, or does not provide a satisfactory explanation for the source of funds,” he said, adding that the reported alleged cash loans followed by large cash deposits are scrutinised by the authorities.
He also noted that during the assessments, evidence has to be submitted to show the source of the loan and the manner of the loan. If the cash loan or deposit exceeds the prescribed limits, the department will initiate penalty proceedings.