Key Takeaways

Section 185 (Income Tax Act, 2025; formerly Section 269SS) prohibits acceptance of loan or deposit of Rs. 20,000 or more in cash — penalty equivalent to 100% of the amount applies.
Section 188 (formerly Section 269T) prohibits repayment of loan or deposit of Rs. 20,000 or more in cash — penalty equivalent to 100% of the amount applies.
Section 186 (formerly Section 269ST; Section 269SU merged into Section 186) prohibits any person from receiving Rs. 2,00,000 or more in cash in a single transaction, from one person in a day, or in respect of one event — penalty of 100% of the amount applies.
Electronic payment facility obligations (formerly Section 269SU) are now part of Section 186, mandating businesses with turnover exceeding Rs. 50 crore to provide UPI, NEFT, RTGS, and debit card payment facilities.
Section 36 (formerly Section 40A(3)) disallows business expenditure exceeding Rs. 10,000 paid otherwise than by account payee cheque or electronic mode (subject to exceptions under Rule 6DD).
Section 393 (formerly Section 194N) imposes TDS at 2% on cash withdrawals exceeding Rs. 1 crore (20% for non-filers of returns).
These provisions collectively form a comprehensive anti-cash framework aimed at promoting a digital and transparent economy.

Section 185: Prohibition on Accepting Loans/Deposits in Cash

(Income Tax Act, 2025; formerly Section 269SS of the Income Tax Act, 1961)

Section 185 of the Income Tax Act, 2025 provides that no person shall take or accept from any other person any loan or deposit or any specified sum of Rs. 20,000 or more otherwise than by:

Account payee cheque
Account payee bank draft
Electronic clearing system (ECS) through a bank account
RTGS (Real Time Gross Settlement)
NEFT (National Electronic Funds Transfer)
UPI (Unified Payments Interface)
Any other electronic mode as prescribed under Rule 6ABBA

Scope of Section 185

| Term | Includes | |------|----------| | Loan | Any amount borrowed, whether with or without interest, documented or undocumented | | Deposit | Deposits made with any person (not just banks) — includes advances and security deposits | | Specified sum | Any sum of money receivable in relation to transfer of an immovable property (whether or not as advance, whether or not for part or whole of consideration) | | Person | Includes individuals, HUFs, firms, companies, AOPs — no exemption for any category |

Exceptions to Section 185

Section 185 does not apply to transactions with:

The Government
Any banking company, post office savings bank, or cooperative bank
Any corporation established by a Central, State, or Provincial Act
Any government company as defined under Section 2(45) of the Companies Act, 2013
Transactions where both parties are having agricultural income and neither has any income chargeable to tax (the CBDT has clarified this through circulars)

Penalty for Contravention of Section 185

| Parameter | Detail | |-----------|--------| | Penalty | A sum equal to the amount of loan, deposit, or specified sum accepted in contravention | | Levied by | Joint Commissioner (Rule 118 of the Income Tax Rules, 2026) | | Reasonable cause defense | Available under Section 472 (formerly Section 273B) — if the assessee proves there was reasonable cause for the failure, no penalty shall be imposed | | Time limit | Penalty order must be passed within the limitation period under Section 472 |

Section 188: Prohibition on Repayment of Loans/Deposits in Cash

(Income Tax Act, 2025; formerly Section 269T)

Section 188 mirrors Section 185 on the repayment side. No branch of a banking company, cooperative society, firm, or other person shall repay any loan or deposit or any specified advance of Rs. 20,000 or more otherwise than by:

Account payee cheque
Account payee bank draft
ECS, RTGS, NEFT, UPI, or other prescribed electronic mode

Penalty for Contravention of Section 188

| Parameter | Detail | |-----------|--------| | Penalty | A sum equal to the amount of loan or deposit repaid in contravention | | Levied by | Joint Commissioner | | Reasonable cause defense | Available under Section 472 (formerly Section 273B) | | Form | Penalty proceedings initiated through notice; no specific form prescribed |

Key distinction: Section 185 governs the receiver/acceptor of cash, while Section 188 governs the payer/repayer of cash. Both carry identical 100% penalties.

Section 186: Prohibition on Cash Receipts of Rs. 2 Lakh or More

(Income Tax Act, 2025; formerly Section 269ST; Section 269SU merged into Section 186)

Section 186 (introduced from 1 April 2017, formerly Section 269ST) provides that no person shall receive an amount of Rs. 2,00,000 or more:

Three Limbs of Section 186

| Limb | Description | Example | |------|-------------|---------| | (a) In aggregate from a person in a day | Total cash received from one person across all transactions in a single day must not reach Rs. 2 lakh | A jeweller receives Rs. 1.5 lakh in the morning and Rs. 80,000 in the evening from the same customer = violation | | (b) In respect of a single transaction | Cash received for one transaction must not reach Rs. 2 lakh, regardless of how many days the payment is spread over | A consultant receives Rs. 2.5 lakh in cash for one engagement, paid in 3 instalments over 3 days = violation | | (c) In respect of one event or occasion | Total cash received for one event/occasion must not reach Rs. 2 lakh, even from different persons | A caterer receives Rs. 3 lakh in cash for a wedding reception from the bride's and groom's families combined = violation |

Exceptions to Section 186

Section 186 does not apply to:

Receipt by Government
Receipt by any banking company, post office savings bank, or cooperative bank
Transactions referred to in Section 185 (which are separately governed)
Such other persons or class of persons or receipts as may be notified by the Central Government

Penalty for Violation of Section 186

(formerly penalty under Section 271DA)

| Parameter | Detail | |-----------|--------| | Penalty | A sum equal to the amount of receipt in contravention | | Levied on | The person receiving the cash (not the payer) | | Levied by | Joint Commissioner | | Reasonable cause defense | Available under Section 472 (formerly Section 273B) |

Critical point: Under Section 186, the receiver is penalised, not the payer. This is different from Section 36 (formerly Section 40A(3)), where the consequence falls on the payer through disallowance.

Section 186: Mandatory Electronic Payment Facilities

(formerly Section 269SU — merged into Section 186 under the Income Tax Act, 2025)

Section 186 also provides (incorporating the former Section 269SU) that every person carrying on business shall, if his total sales, turnover, or gross receipts exceed Rs. 50 crore during the immediately preceding tax year, provide facilities for accepting payment through the following prescribed electronic modes:

| Prescribed Mode | Rule | |----------------|------| | UPI (Unified Payments Interface) | Rule 119AA of the Income Tax Rules, 2026 | | NEFT (National Electronic Funds Transfer) | Rule 119AA | | RTGS (Real Time Gross Settlement) | Rule 119AA | | Debit cards powered by RuPay | Rule 119AA |

Penalty for Non-Provision of Electronic Payment Facilities

(formerly penalty under Section 271DB)

| Parameter | Detail | |-----------|--------| | Penalty | Rs. 5,000 per day for every day of default | | Levied by | Joint Commissioner | | Reasonable cause defense | Available under Section 472 (formerly Section 273B) | | No merchant surcharge | No bank or payment system provider can levy any charge or MDR on transactions through the prescribed modes (as per RBI/CBDT notifications) |

Section 36: Disallowance of Cash Expenditure

(Income Tax Act, 2025; formerly Section 40A(3) of the Income Tax Act, 1961)

Section 36 provides that where the assessee incurs any expenditure in respect of which a payment or aggregate of payments to a person in a day exceeds Rs. 10,000 (Rs. 35,000 for transporters under Rule 6DD(k)) otherwise than by account payee cheque, bank draft, or electronic mode, no deduction shall be allowed for such expenditure.

| Parameter | Detail | |-----------|--------| | Threshold | Rs. 10,000 per person per day (Rs. 35,000 for transport payments under Rule 6DD(k)) | | Consequence | 100% disallowance of the expenditure | | Applicable to | Any expenditure under the head "Profits and gains of business or profession" | | Section 36 (deemed income limb) | If the expenditure was allowed in an earlier year and repayment is in cash exceeding Rs. 10,000, the amount is deemed income of the year of repayment (formerly Section 40A(3A)) |

Rule 6DD: Exceptions to Section 36

Rule 6DD of the Income Tax Rules, 2026 lists 13 exceptions where cash payments exceeding Rs. 10,000 are not disallowed:

| Exception | Description | |-----------|-------------| | (a) | Payment to RBI, banking company, cooperative bank, post office, Government | | (b) | Payment to LIC, pension funds, or insurance companies for policies | | (c) | Payment by way of adjustment against a liability for goods supplied or services rendered | | (d) | Payment for purchase of agricultural produce from the cultivator/grower | | (e) | Payment for purchase of cottage industry products from the producer without aid of power | | (f) | Payment to an employee of salary, gratuity, etc. for service in a place where banking facilities are not available | | (g) | Payment required by any law to be in legal tender | | (h) | Payment of compensation on acquisition of immovable property by Government | | (i) | Payment by authorised dealer/money changer against purchase of foreign currency or travellers cheques | | (j) | Payment by any person against a bill of exchange payable to bearer | | (k) | Payment for plying, hiring, or leasing goods carriages — threshold is Rs. 35,000 instead of Rs. 10,000 | | (l) | Payment made in a village not served by a bank within 10 km, on a day when the bank was not open | | (m) | Payment to the Government for any purpose |

Section 393 (Table): TDS on Cash Withdrawal

(Income Tax Act, 2025; formerly Section 194N of the Income Tax Act, 1961)

Section 393 (read with the applicable Table entry for cash withdrawals) provides for TDS on cash withdrawals from bank accounts:

| Parameter | Detail | |-----------|--------| | Threshold (filers) | Cash withdrawal exceeding Rs. 1 crore in a financial year | | TDS rate (filers) | 2% on the amount exceeding Rs. 1 crore | | Threshold (non-filers) | Cash withdrawal exceeding Rs. 20 lakh | | TDS rate (non-filers) | 20% on the amount exceeding Rs. 20 lakh (if returns not filed for preceding 3 tax years) | | Deductor | Banking company, cooperative bank, or post office | | Form | TDS reported in Form 26QS (quarterly statement) | | Rule | Rule 31AA — statement of TDS |

Non-filer means a person who has not filed the return of income for all three tax years preceding the tax year in which the cash withdrawal is made, and the due date for filing has expired.

Rule 114B: Transactions Requiring PAN

Rule 114B of the Income Tax Rules, 2026 prescribes transactions where quoting of Permanent Account Number (PAN) is mandatory:

| Transaction | Threshold | |-------------|-----------| | Sale or purchase of immovable property | Rs. 10 lakh or more (or stamp duty value, whichever is higher) | | Sale or purchase of motor vehicle | All (except two-wheelers) | | Opening a bank account (other than Basic Savings) | All | | Fixed deposit with bank/post office/cooperative bank | Rs. 50,000 or more (or aggregate Rs. 5 lakh in a FY) | | Payment to hotels and restaurants | Rs. 50,000 or more at one time | | Purchase of mutual fund units | Rs. 50,000 or more | | Purchase of shares/debentures of a company | Rs. 10 lakh or more | | Purchase of RBI bonds | Rs. 50,000 or more | | Cash deposit with bank | Rs. 50,000 or more in a day | | Payment of life insurance premium | Rs. 50,000 or more in a year | | Foreign travel | Rs. 50,000 or more at one time |

Form: PAN is quoted in Form 60 (if PAN is not available) or on the transaction document itself.

Rule 114E: Statement of Financial Transactions (SFT)

Rule 114E requires specified persons to furnish a Statement of Financial Transactions (SFT) in Form 61A:

| Reporting Person | Transaction | Threshold | |-----------------|-------------|-----------| | Banks | Cash deposits (savings) | Rs. 10 lakh or more in a FY | | Banks | Cash deposits (current) | Rs. 50 lakh or more in a FY | | Banks | Fixed deposits | Rs. 10 lakh or more in a FY | | Credit card companies | Credit card payments | Rs. 10 lakh or more in a FY | | Mutual fund companies | Purchase of units | Rs. 10 lakh or more in a FY | | Bond/debenture issuers | Purchase of bonds | Rs. 10 lakh or more in a FY | | Registrar/Sub-registrar | Purchase of immovable property | Rs. 30 lakh or more | | Companies | Receipt of cash for shares | Rs. 10 lakh or more in a FY | | Authorised dealers | Foreign exchange purchase/sale | Rs. 10 lakh or more in a FY |

Filing deadline: On or before 31 May of the financial year following the year in which the transaction is registered or recorded.

Form 61A data feeds directly into the taxpayer's Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) on the income tax portal.

Landmark Judgement

Assistant Commissioner of Income Tax v. Smt. Harshila Chordia (2007) 298 ITR 349 (Rajasthan HC)

Facts: The assessee, Smt. Harshila Chordia, accepted cash loans exceeding Rs. 20,000 in contravention of Section 269SS. The Joint Commissioner imposed penalty under Section 271D equal to the amount accepted. The assessee contended that there was reasonable cause for accepting cash as the transactions were genuine, occurred in an emergency, and banking facilities were not readily accessible.

Held: The Rajasthan High Court held that the penalty under Section 271D (now penalty under Chapter XXI of the Income Tax Act, 2025) is not automatic and the assessee has the right to demonstrate "reasonable cause" under Section 273B (now Section 472). The Court observed that the cash transaction penalty provisions are stringent (100% of the amount), and therefore the "reasonable cause" defence must be interpreted liberally. The genuineness of the transaction, the urgency, the lack of banking facilities, and the business exigency are all relevant factors. Where the assessee establishes reasonable cause, the penalty must be deleted even though the contravention is admitted.

Significance: This judgement established that cash transaction violation penalties are not mandatory in every case of contravention. The reasonable cause defence under Section 472 (formerly Section 273B) is a substantive right of the assessee, and the penalty authority must consider all circumstances before imposing the penalty. This has been consistently followed by tribunals and High Courts across India.

Worked Example: Cash Limit Violations and Penalty Calculations

Facts: M/s Sharma Traders (a partnership firm) undertakes the following transactions during FY 2025-26:

| Transaction | Amount (Rs.) | Mode | Violation? | |-------------|-------------|------|-----------| | Accepted loan from Mr. A | 50,000 | Cash | Yes — Section 185 (formerly Section 269SS) | | Repaid deposit to Mr. B | 25,000 | Cash | Yes — Section 188 (formerly Section 269T) | | Received payment from customer Mr. C (1 bill) | 2,50,000 | Cash | Yes — Section 186 (formerly Section 269ST) | | Paid contractor Mr. D for services | 15,000 | Cash | Yes — Section 36 (formerly Section 40A(3)) | | Paid transporter Mr. E for goods carriage | 30,000 | Cash | No — within Rs. 35,000 (Rule 6DD(k)) | | Cash withdrawal from bank (cumulative FY) | 1,20,00,000 | Cash | TDS applicable — Section 393 (formerly Section 194N) |

Penalty and Consequence Computation:

| Violation | Section (2025 Act) | Formerly | Penalty/Consequence | Amount (Rs.) | |-----------|-------------------|----------|-------------------|-------------| | Loan accepted in cash | Penalty under Chapter XXI | Section 271D | 100% of loan amount | 50,000 | | Deposit repaid in cash | Penalty under Chapter XXI | Section 271E | 100% of deposit repaid | 25,000 | | Cash receipt > Rs. 2 lakh | Section 186 penalty | Section 271DA | 100% of receipt | 2,50,000 | | Cash payment to contractor | Section 36 | Section 40A(3) | Disallowance of expenditure (no penalty, but income increases) | 15,000 added back to income | | Transporter payment | — | — | No violation (Rule 6DD(k) exception) | Nil | | Cash withdrawal | Section 393 | Section 194N | TDS at 2% on amount exceeding Rs. 1 crore | 2% of Rs. 20,00,000 = Rs. 40,000 TDS |

Total penalties: Rs. 3,25,000 (cash transaction violation penalties under Chapter XXI) Additional tax impact: Rs. 15,000 disallowance under Section 36 (formerly Section 40A(3)) increases taxable income. TDS deducted by bank: Rs. 40,000 under Section 393 (formerly Section 194N) — adjustable against final tax liability.

Expert Tip

CA Vrajkishor Changani says: The most commonly missed compliance is Section 186 (formerly Section 269ST) — many businesses still accept large cash amounts from customers for single events (weddings, bulk orders) without realising that the Rs. 2 lakh limit applies per event/occasion, not per bill. Keep detailed records of event-wise receipts and ensure your billing team is trained on this. For Section 36 (formerly Section 40A(3)), maintain a register of cash payments and always check Rule 6DD exceptions before making payments — the transporter exception at Rs. 35,000 is widely applicable. Most importantly, if you receive a penalty notice for violation of Section 185 or Section 188 (formerly Sections 271D or 271E), do not panic — the "reasonable cause" defence under Section 472 (formerly Section 273B) is powerful. Document the emergency, the genuineness of the transaction, and the business necessity. Courts have consistently given relief where reasonable cause is established.

Section Interconnect

Also read: Chapter 12 — Unexplained Income (Sections 102-106, formerly Sections 68-69D) (cash transactions often trigger unexplained income additions under Section 102)
Also read: Chapter 13 — Penalties & Prosecution (penalty framework under Chapter XXI, relevant for cash violation consequences — Section 472 reasonable cause defence)
Also read: Chapter 10 — TDS, TCS & Advance Tax (Section 393 TDS on cash withdrawal, formerly Section 194N, covered in detail)

Frequently Asked Questions

Q1: Does Section 185 apply to cash deposits made with a bank?

No. Section 185 (formerly Section 269SS) specifically excludes transactions with banking companies, post office savings banks, and cooperative banks. You can deposit any amount of cash into your bank account without violating Section 185. However, cash deposits exceeding Rs. 10 lakh (savings) or Rs. 50 lakh (current) in a financial year will be reported under the SFT (Form 61A, Rule 114E), and you may receive an income tax notice seeking explanation.

Q2: If I receive Rs. 1,90,000 in cash, is it a violation of Section 186?

No. Section 186 (formerly Section 269ST) applies only when the amount is Rs. 2,00,000 or more. A receipt of Rs. 1,90,000 in cash from one person in one day for one transaction does not violate Section 186. However, if you receive another Rs. 15,000 from the same person on the same day, the aggregate becomes Rs. 2,05,000, which would be a violation of Section 186(a) (aggregate from one person in a day).

Q3: Can a landlord accept rent in cash of Rs. 50,000 per month from a tenant?

Yes, for Section 185 purposes, rent is generally not treated as a "loan or deposit or specified sum," so Section 185 does not apply. However, Section 186 applies — the landlord cannot receive Rs. 2,00,000 or more in cash from the tenant in a single day, transaction, or event. Monthly rent of Rs. 50,000 in cash is permissible under Section 186 (being below Rs. 2 lakh per transaction). But the landlord should also be aware that the tenant may face disallowance under Section 36 (formerly Section 40A(3)) if the rent is a business expense paid in cash exceeding Rs. 10,000.

Q4: What is the penalty if Section 393 TDS is not deducted by the bank on cash withdrawals?

If a bank fails to deduct TDS under Section 393 (formerly Section 194N) on cash withdrawals, the bank is treated as an "assessee in default" under Section 398 (formerly Section 201). The bank faces:

Interest under Section 398: 1% per month (or part) from the date when TDS was deductible to the date of actual deduction/payment.
Penalty for non-deduction of TDS: Equal to the amount of TDS not deducted (under the relevant penalty provisions of Chapter XXI). However, the account holder is not penalised — the obligation to deduct lies solely on the bank. The account holder's liability is limited to the TDS amount being adjustable against their final tax liability.

Q5: Are UPI payments considered valid under Sections 185 and 36?

Yes. UPI payments are explicitly recognised as a valid electronic mode under Rule 6ABBA of the Income Tax Rules, 2026. Payments made through UPI satisfy the requirements of Sections 185, 186, 188, and 36 (formerly Sections 269SS, 269ST, 269T, and 40A(3)). The key requirement is that the UPI payment should be linked to a bank account in the name of the payer and should be traceable. This was clarified by CBDT Notification No. 8/2020.

Disclaimer: This article is for educational purposes only and does not constitute legal or tax advice. Tax laws are subject to amendments. Please consult qualified CAs for advice specific to your situation.

Received a penalty notice for a cash transaction violation? Our qualified CAs at DRSPV & Associates can help you with the reasonable cause defence and penalty proceedings. Chat with us on WhatsApp for a personalised consultation.

Cash Transaction Restrictions — Sections 185, 186, 188 (formerly 269SS, 269ST, 269T) | Penalties & Compliance