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Income Tax · BusinessCash payments under Section 40A(3): disallowance with examples
Paying a supplier ₹15,000 in cash can cost your business the entire deduction for that expense. Section 40A(3) disallows cash expenses above ₹10,000 per person per day. Here are the rules, the Rule 6DD exceptions, and examples of what tax officers check.
Section 40A(3) of the Income-tax Act, 1961 discourages cash transactions by disallowing business expenditure paid otherwise than by account-payee cheque, account-payee draft or electronic modes, where the payment to a person in a day exceeds the limit. The rule continues under the Income-tax Act, 2025 in the provisions on disallowances.
The rule
| Point | Rule |
|---|---|
| Payment | Expenditure for which deduction is claimed |
| Mode | Other than account-payee cheque, account-payee draft, ECS, UPI, net banking, debit/credit card or other prescribed electronic modes |
| Limit | Aggregate > ₹10,000 to a person in a day |
| Transporters | Limit ₹35,000 for payments for plying/hiring/leasing goods carriages |
| Consequence | Entire payment disallowed (not just the excess) |
Section 40A(3A): later payments
If an expense was allowed in an earlier year on accrual basis and is paid in cash in a later year above ₹10,000 per day, the payment is deemed to be income of the year of payment.
Rule 6DD exceptions
No disallowance where payment is made, for example:
- to the RBI, banks, co-operative banks, LIC or government (where cash is legal tender required);
- by letters of credit, bills of exchange, bank transfers or adjustment against amounts receivable from the payee;
- to a cultivator, grower or producer of agricultural, forest, animal husbandry, dairy, poultry, fish products, or for products of cottage industries made without power;
- in a village or town without any bank, to a person ordinarily residing there;
- of terminal benefits (gratuity, retrenchment) to an employee with taxable income below the exemption limit, where payment is ≤ ₹50,000;
- of salary to an employee posted for more than 15 days at a place without a bank account, or on a ship;
- on a day when banks were closed due to holiday or strike.
Worked examples
| Case | Facts | Disallowance |
|---|---|---|
| A | Trader pays a supplier ₹14,000 in cash for goods on 5 May | ₹14,000 (whole amount) |
| B | Trader pays ₹8,000 + ₹7,000 in cash to the same supplier on the same day | ₹15,000 (aggregate per day) |
| C | Pays ₹9,000 in cash on 5 May and ₹9,000 on 6 May for separate bills | Generally none (separate days, separate bills) – but repeated patterns attract scrutiny |
| D | Pays a truck owner ₹30,000 in cash for hiring his truck | None (transporter limit ₹35,000) |
| E | Pays a farmer ₹60,000 in cash for vegetables | None (Rule 6DD – producer of agricultural produce) |
| F | Pays electricity bill ₹25,000 in cash at the government counter | None if within Rule 6DD (payment to government where cash is legal tender) |
Worked example: impact on tax
Example: A wholesale trader in Narela, not under presumptive tax, paid ₹6,40,000 in cash to various suppliers in amounts above ₹10,000 per day during the year. The entire ₹6,40,000 is disallowed and added to income. At a 30% slab plus cess, the extra tax is about ₹2 lakh – more than many traders' annual audit fees and banking costs combined.
Related cash restrictions
| Section | Rule |
|---|---|
| 269SS | No acceptance of loans, deposits or specified sums of ₹20,000 or more in cash |
| 269T | No repayment of loans or deposits of ₹20,000 or more in cash |
| 269ST | No receipt of ₹2 lakh or more in cash in a transaction, day or event |
| 43(1) proviso | Cash payment above ₹10,000 for an asset – that part excluded from cost for depreciation |
| 35AD | Capital expenditure paid in cash above ₹10,000 – not eligible |
| 80D / 80G | Cash not allowed for premiums / donations above ₹2,000 |
Penalties under 269SS/269T/269ST equal the amount involved.
Presumptive taxpayers
If you are under Section 44AD/44ADA/44AE, expenses are deemed allowed and 40A(3) does not apply separately. But cash receipts affect the 6%/8% rate and the higher turnover limits.
Reporting in tax audit
Clause 21(d) of Form 3CD requires the auditor to report payments covered by 40A(3) and 40A(3A). Auditors examine the cash book for payments above ₹10,000 per party per day. See tax audit Forms 3CA, 3CB, 3CD.
Practical tips
- Pay all suppliers through UPI or bank transfer, even for small amounts.
- Record the reason when a Rule 6DD exception applies (e.g. farmer's declaration with land details).
- Do not split payments artificially.
- Review the cash book monthly.
Key takeaway
Cash expenses above ₹10,000 per person per day are disallowed in full, subject to narrow Rule 6DD exceptions. With UPI available everywhere, there is little reason to pay suppliers in cash. Our accounting and audit teams review cash books before year-end to avoid disallowances.
Official references
Provisions discussed (summaries in our Law Library):
- Income-tax Act, 2025 – Section Business disallowances (corresponds to 40A(3)): Cash payments above ₹10,000
- Income-tax Act, 1961 – Section 40A(3) (corresponds to Business disallowances): Cash payments above ₹10,000
Official sources to verify the current text, notifications and circulars:
Frequently asked questions
What is the cash limit under Section 40A(3)?
₹10,000 in aggregate per person per day for expenses. For payments to transporters for plying, hiring or leasing goods carriages, the limit is ₹35,000.
Is purchase of goods covered by Section 40A(3)?
Yes. Purchases of stock-in-trade are expenses for this purpose, so cash purchases above ₹10,000 per day from one supplier are disallowed.
Does Section 40A(3) apply to capital expenditure?
No. It applies to revenue expenditure. However, depreciation is denied on the part of the asset cost paid in cash above ₹10,000 per day (Section 43(1)).
Can I split a payment into several cash payments below ₹10,000?
Not on the same day to the same person – the aggregate per day is considered. Splitting across days to avoid the rule may be questioned as a colourable device.
Does 40A(3) apply to salary paid in cash?
Yes, salary is an expense. Cash salary above ₹10,000 per day to an employee is disallowed unless a Rule 6DD exception applies (for example, employee posted where no bank exists).
Are payments by debit card or UPI safe under 40A(3)?
Yes. Debit/credit cards, UPI, net banking, ECS and other prescribed electronic modes are permitted modes.
Does 40A(3) apply to presumptive taxpayers?
No, because expenses are not separately claimed under presumptive schemes.
This article is general information on the law as on 10 November 2026, written for educational purposes. It is not professional advice for your case. Section numbers under the Income-tax Act, 2025 should be confirmed with the official section mapping on the Income Tax Department website before use in filings.
Have a tax, GST or business question?
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