Borrowed cash from a friend? You may end up paying income tax penalty

India Today

16 hours ago

In times of emergency, many of us don't think twice before borrowing money from a friend. That's what Rahul did when he urgently needed funds, who borrowed Rs 1.2 lakh in cash from his friend. But what seemed like a harmless favour could now cost him the same amount in penalty.TaxBuddy, a tax advisory platform, recently shared Rahul's case to raise awareness. His story is not unique; many people still don't realise that large cash dealings, even between friends, can attract serious penalties.advertisementIt wrote on X, 'For an emergency, Rahul took a loan of 1,20,000 from his friend in cash. Now an income-tax penalty of 1,20,000 looms over him. Dealing in cash? Please BEWARE. Here are income-tax penalties that you may be exposed to.'
Let's break down why dealing in cash can be risky and what the tax rules really say.WHY CASH DEALS CAN INVITE TAX PENALTIESThe Income Tax Department is strict when it comes to large cash transactions. Whether it's taking a loan, repaying one, or even making donations, there are limits you need to follow. Go beyond those, and you could face a penalty equal to the entire amount involved.Take Rahul's case. Since he accepted a loan of over Rs 20,000 in cash, he violated Section 269SS of the Income Tax Act. This section says you cannot accept Rs 20,000 or more in cash as a loan, deposit, or advance from anyone at any time. The penalty? A fine equal to the loan received, under Section 271DA.OTHER COMMON CASH TRAPS YOU SHOULD AVOIDThat's not all. If you receive Rs 2 lakh or more in cash from a person in a single day, or for one transaction or event, you could be caught under Section 269ST. The penalty here is also 100% of the amount received.Similarly, if you repay any loan or deposit of Rs 20,000 or more in cash, even to a friend or family member, you could face a fine under Section 269T.If you're running a business and make a cash payment of over Rs 10,000 to a single person in a day, that amount won't be allowed as an expense while calculating your profits. This means you may end up paying more tax.WATCH OUT WHEN PAYING INSURANCE OR MAKING DONATIONSMany people also lose tax benefits without realising it. For instance, if you donate over Rs 2,000 in cash to a charity or temple, you won't get any tax deduction under Section 80G.advertisementSimilarly, paying your health insurance premium in cash means no tax relief, unless it's for a preventive health check-up up to Rs 5,000.BIG CASH WITHDRAWALS? BANKS MIGHT CUT TDSEven withdrawing large amounts of cash from your bank account can attract TDS (Tax Deducted at Source). If you take out more than Rs 1 crore in a year, banks will deduct 2%.And if you haven't filed your income tax returns for the past three years and withdraw over Rs 20 lakh, the TDS goes up to 5%.GO DIGITAL, STAY SAFEWith so many rules around cash, it's safer to use digital modes, like bank transfers, UPI, or cheques, especially when large amounts are involved. Not only does it keep you compliant with tax laws, but it also helps you avoid unnecessary fines and complications.So next time you reach for your wallet to make or receive a big cash payment, think twice. The taxman might be watching.(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)- EndsMust Watch