According to Rule 6DD of Income Tax Act, one can make cash payments of upto Rs. 10,000 only on a single day.
If the amount exceeds Rs. 10,000, one has to make payments via cheques and demand drafts.
Let’s delve into more details.
What is Rule 6DD?
The Central Board of Direct Taxes (CBDT) introduced recent amendments to Income Tax Rules for limiting cash exchange in a day.
Earlier, one could make cash payments up to Rs. 20,000 in a day. But, reducing the exchange of cash has many benefits. Some of them include digital discounts, financial discipline and convenience.
The government has amended Income Tax Rules of 1962 to further reduce the upper limit of cash payments made to a person on a single day.
Therefore, as per Rule 6DD, the upper limit of cash payment to a person on a single day stands at Rs. 10,000 now. If it exceeds Rs. 10,000, one has to pay via cheque, demand draft or any mode prescribed in Rule 6ABBA.
Rule 6ABBA mentions the following digital modes of payments:
UPI (Unified Payment Interface)
IMPS (Immediate Payment Service)
BHIM (Bharat Interface for Money) Aadhaar Pay
RTGS (Real Time Gross Settlement)
NEFT (National Electronic Funds Transfer)
Cash Transactions Under Rule 6DD
The Government of India actively promotes a cashless and digitised economy because electronic transactions keep a clear record and promote transparency.
Transparency in records makes it difficult for people to escape paying taxes and cuts down on black money.
Generally, there are no limits for cash payments when buying jewellery or immovable properties. However, one must note that if the transaction amount is more than Rs. 2 lakh, then the seller cannot accept cash beyond Rs. 2 Lakh.
When a business pays more than Rs. 10,000 to a person in a day in cash, Income Tax authorities will not see it as business expenditure. Therefore, tax deductions will not be applicable. So, there will be higher payment of taxes.
However, there are certain circumstances where cash payment exceeding Rs. 10,000 will be taken into consideration. For example, Income Tax authorities have set an upper limit of Rs. 35,000 for cash transaction in case of leasing or hiring vehicles like lorries, trucks, etc.
Section 40A(3a) of Income Tax Act, 1961
According to Section 40A(3a), if a particular payment is made in a year after the year in which the amount was claimed as deduction, and the amount exceeded Rs. 10,000 which was paid in cash, then the amount will be treated as income from business or profession.
However, in case of hiring, plying or leasing goods carriages, the threshold is Rs. 35,000 instead of Rs. 10,000. Any payment below Rs. 35,000 will not be treated as income from business or profession.
Exceptions Under Rule 6DD
Listed below are the exceptions that Rule 6DD allows:
Payments made to Government
Direct tax, customs, GST and other cash payments to the Government can exceed Rs. 10,000. For example, one can pay in cash while buying scrap iron from a governmental organization.
Payments made to credit institutions and banks
Rule 6DD does not cover cash payments to LIC, Reserve Bank of India, public sector banks, agricultural credit societies, land mortgage banks and cooperative banks.
Payments made via banking system
Rule 6DD does not apply if one pays via credit/debit card, ECS, letter of credit and book adjustments between banks or in the same bank, telegraph or transfer mail and bills of exchange payable to banks.
Payments related to terminal benefits
The payment made to the legal heir after one’s death does not fall under Rule 6DD, provided the amount is within Rs. 50,000. Moreover, suppose a company temporarily posts its employee at a remote place or a ship where a banking facility is unavailable, the company pays his/her salary in cash.
Moreover, payments made on a day when banks are closed due to a strike or holidays will be out of the ambit of Rule 6DD.
Payments made through book entries
Cash payments to producers of agricultural, forest or animal husbandry products, or those involved in dairy, fisheries do not fall under this rule. Also, payments to rural individuals where banking facility is not available are also exempted from this rule.
To sum up, Income Tax Rule 6DD states that one cannot pay more than Rs. 10,000 in cash to a particular person in a day. One has to make payments exceeding the mentioned amount via any other mode.
The cases when Rule 6DD allows for exceptions are also provided for readers’ convenience.
FAQs on Rule 6DD
Q1. What happens when an employee has to receive their salary in cash?
If the employee is posted in a remote village or a ship for more than 15 days, salary payments can be made via cash. Moreover, if the employee is a resident of a place where a banking facility is not available, then one can pay the salary in cash. In such cases Rule 6DD is not applicable.
Q2. What does disallowance under Section 40A mean?
Section 40A of the Income Tax Act mentions the disallowed expenses and payments that you cannot deduct under specific circumstances while you compute income under the head of Profit under Business or Profession. The Finance Act of 1968 introduced this particular Section 40A(3) of Income Tax Act.
Q3. What will happen if an expense is claimed as a deduction this year and paid next year?
If you claimed an expense as deduction this year and paid in the following year/years, and if the payment exceeds Rs. 10,000 is made via cash, then it will fall under profit of the business or profession and will become taxable.
Q4. Will Section 40A(3) be applicable to individuals?
Yes. A person cannot pay anyone more than Rs. 10,000 in cash in a single day. If the amount exceeds the prescribed limit, you should pay through Credit/Debit cards, demand drafts and cheques. One can pay up to Rs. 35,000 in cash to lease or hire goods vehicles.
Q5. What is the applicability of Section 40A(3) for capital expenditure?
No. The rules of Section 40A(3) will be applicable only on revenue expenditure and not on capital expenditure. However, many people often misuse this loophole in the laws. The government has taken effective steps to curb such tax evading tendencies of people.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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