Cash Loans From Friends? You May Face Huge Income Tax Fines

When borrowing money from your friends, it generally seems harmless, especially if there is an emergency. However, borrowing the same amount in cash could lead to an expensive income tax penalty.

Real Life Warning Tale

Mohan borrowed ₹1 lakh in cash from a friend during a cash crunch. He is currently facing an equal liability of ₹1 lakh as income tax penalty. TaxBuddy posted this above scenario not to embarrass Mohan, rather to warn all readers the troubles associated with acceptance of “cash” loan transactions.

Why Cash Loans Are Dangerous

There is a prohibition on acceptance of cash loan or deposit on cash for ₹20,000 or more from one lender per day in Section 269SS of the Income Tax Act. Rahul violated this prohibition now faces a penalty of the same amount in Section 271DA.

Other Dangerous Cash Transactions

There are also penalties for accepting cash for ₹2 lakh or more for a single transaction or event under Section 269ST. The same penalties apply for repayment of a loan of ₹20,000 or more in cash under Section 269T.
This applies to your friends, family, or any other parties.

Cash Expenses Have Significant Tax Consequences

If you operate a business and pay cash to one person in excess of ₹10,000 in one day, your business operation may be at risk. That payment is not a deductible expense when calculating your taxable profit, resulting in opening yourself up to more income tax to pay.

Don’t Lose Tax Benefits on Donations and Insurance:

If you donate more than ₹2,000 in cash, you won’t receive tax deductions under Section 80G.
If you pay your health insurance premium in cash, it won’t be eligible for tax deductions – except for preventive health check-ups for up to ₹5,000.

Cash Withdrawals also Cause TDS:

Withdraw more than ₹1 crore in a financial year, and your bank will automatically deduct 2% TDS.
No tax returns in the last three years and you withdraw more than ₹20 lakh, then the TDS will increase to 5%.

Go Digital and Safe from Taxes:

Avoid accessing large amounts of cash – you will have penalty fears.
You can also use digital means, such as UPI, bank transfer, or cheques.
Digital payments have stronger records under tax statutes and are accepted as such.
There is less risk of legal issues, income tax notices, etc.

Be Careful While Receiving or Giving Cash:

Even if it is a friend or family member – Giving or taking large amounts of cash should be avoided.
The tax department will be observing the money you take and give – better to be safe than sorry.