18/02/2017 1:46 PM IST | Updated 21/02/2017 9:03 AM IST

Be Careful About These Rules... Or Accepting A Cash Payment Could Burn You

Mukesh Gupta / Reuters

"Money doesn't talk, it swears," said Bob Dylan. For some that is exactly what it did at the end of 2016. Stockpiles of demonetised currency notes had to be brought to the bank and deposited. The "surgical strike" on black money, as it was being called, was hotly debated and mostly reproved. The government promised to fully remonetise, but not without barring large cash transactions and imposing stiff penalties for non-compliance.

Ban on receiving 3 lakhs or more in cash

Sometime in 2016, an SIT headed by Justice MB Shah recommended a ban on cash dealings above ₹3lakhs and prohibition of cash holding in excess of ₹15 lakh by individuals. The government has accepted this recommendation partly.

As per proposals in budget 2017, effective 1 April 2017, you are prohibited from receiving ₹3lakhs or more in cash—

From one person in a day, OR

For a single transaction, OR

For transactions related to an event or occasion from one person.

(A new section 269ST has been inserted in the income tax act for this purpose).

If you do not comply, all the cash so received has to be deposited as penalty. This is a steep penalty, but you may be let off if you have a reasonable cause. It's important to reiterate that the penalty applies to the recipient. This rule does not apply to banks and to the government. So you can deposit any amount in your account or pay to the government in cash.

Even if you try to spread receipts over days or weeks, you cannot receive ₹3 lakh or more for a single business transaction.

People are wont to bypass rules to save tax, but this ban on cash transactions is a comprehensive one. Let's understand impact of this change.

Impact on property deals: The seller is now barred from receiving ₹3 lakh or more in cash from the buyer. The same applies if there is more than one seller— they are barred from receiving more than ₹3 lakh in cash individually for a single transaction i.e. a property deal.

Impact on business dealings: If you are a businessperson, you can no longer receive ₹3 lakh or more from one person in a day. Even if you try to spread receipts over days or weeks, you cannot receive ₹3 lakh or more for a single business transaction. For example if you are a wedding planner, the maximum amount you can receive as payment for a wedding event has to be under ₹3 lakh. Same for interior decorators, who will have to restrict cash receipts to ₹3 lakh for a single project.

Withdrawals from bank accounts: Planning to withdraw cash from your savings account or current account? The ₹3 lakh limit is applicable here too. Effective 1st April 2017, bank account holders will not be able to withdraw more than ₹3lakhs in a single day. Even though the government has removed cash withdrawal limits from bank accounts starting 13 March, this new rule means you cannot withdraw ₹3 lakh or more in one single day. Since receipts by banks are not covered by the cash ban, there is no restriction on the value of cash deposits in banks or post offices.

Usually, businesses withdraw to pay wages in cash. In this context it is worthwhile to note that the Payment of Wages (Amendment) Bill, 2017 has been passed by Parliament. In due course, the Centre and states will specify industrial units which will have to pay wages only electronically. So businesses will have to exercise due caution while withdrawing and using cash for payments.

TCS on cash transactionsabove2 lakh

TCS is tax collected at source. Unlike TDS which is "deducted" on payments, TCS is "collected" by sellers in addition to the sale price. Sellers deposit TCS with the government and buyers receive a certificate from sellers. Buyers can claim credit of TCS in their income tax return. As per existing rules, TCS has to be collected by sellers on payments made to them in cash in excess of ₹2 lakh. The seller has to charge 1% of the cash component as TCS. Do note that TCS is only collected on the cash component of the transaction, where cash paid exceeds ₹2 lakh. So as a seller, even though you may be able to receive up to ₹3 lakh in cash for goods sold and services provided, you will have to collect TCS as well. This rule is in place since 1 June 2016.

"It's my money and I'll do with it what I want to...." Well, no longer!

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