Borrowing money in cash from a friend can cause double loss, know Income Tax rules and penalty..

In times of emergency, most people borrow money from friends without thinking. This seems to be the easiest way in difficult times, but doing so can prove to be costly. Do you know, you may have to pay the same amount in tax as the amount you have borrowed from a friend in difficult circumstances.

Penalty on large cash transactions

TaxBuddy, a tax advisory platform, has tried to make people aware by sharing Rahul's case. Rahul also did the same. He borrowed ₹ 1.2 lakh cash from his friend in times of need. But the help that seemed easy to him can now return as a fine of the same amount. Such cases are quite common because many people still do not know that large cash transactions, even between friends, can lead to heavy penalties.

TaxBuddy wrote on X (Twitter), “In an emergency, Rahul borrowed ₹1,20,000 cash from his friend. Now he may be charged an income tax penalty of ₹1,20,000. Transactions in cash? Be careful. Here are some income tax penalties that may affect you.”

When and why can a cash transaction attract a penalty?

The Income Tax Department takes a strict stance on large cash transactions. Whether you are borrowing, giving to repay a loan, or making a donation, a limit has been set for this. If you transact in cash beyond that limit, you may be fined the same amount.

In Rahul’s case, he borrowed more than ₹20,000 in cash, thereby violating section 269SS of the Income Tax Act. Under this section, it is prohibited to take ₹20,000 or more in cash as a loan, deposit, or advance from anyone. If you do this, you will have to pay a penalty equal to the amount of the loan taken under section 271DA.

Avoid these mistakes related to cash transactions.
If you take ₹2 lakh or more in cash from someone in a day, for a transaction or an event, then you can be charged a 100% penalty under section 269ST.

Similarly, if you pay a loan or deposit of ₹20,000 or more in cash to someone, whether that person is your friend or a family member, you can be fined under section 269T.

In business, if you make a cash payment of more than ₹ 10,000 to someone in a day, then that amount will not be counted as an expense while calculating your profit, meaning you may have to pay more tax.

Be careful while giving insurance premiums and donations.

Many people unknowingly lose tax benefits. For example, if you donate more than Rs 2,000 in cash to a charity or temple, you will not get any tax exemption under Section 80G.

There will be no tax exemption even if you pay the health insurance premium in cash; only up to ₹ 5,000 can be exempted for a preventive health check-up.

TDS on withdrawing more cash from the bank
TDS (Tax Deducted at Source) can be levied even if you withdraw a large amount from your bank account. If you withdraw more than ₹1 crore in cash from the bank in a year, the bank will deduct 2% TDS. If you have not filed your income tax return for the last 3 years and withdraw more than ₹20 lakh in cash, then the TDS will be 5%.

Adopt digital methods instead of making cash payments.

With so many rules related to cash, the safest way is to use bank transfer, UPI, or cheque, especially for large transactions. This will ensure that you comply with tax laws and also avoid unnecessary penalties. So next time whenever you are going to make or receive a large cash payment, think once that the tax department may be keeping an eye on you.

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