If you run a business — whether it’s a small boutique, a service-based hustle, or a local trading setup — cash is often the easiest go-to. I’ve grown up around people who prefer cash because it “gets things done quickly.” But what many don’t realise is that the Income Tax Act looks at cash payments a little differently.
Section 40(3) basically says: if you pay more than ₹10,000 in cash to someone in a single day, that expense won’t be allowed as a business deduction. For transport-related payments, the limit is a bit higher at ₹35,000.
I remember helping a friend set up his accounts for the first time. He had a perfectly genuine expense — a ₹14,000 urgent repair paid in cash. It was honest, necessary… but still disallowed. That’s when I realised how easily normal business habits can clash with compliance.
This blog is simply my attempt to explain Section 40(3) in the way I wish someone had explained it to us back then.
What Exactly Is Section 40(3)?
In simple terms, Section 40(3) is a provision that restricts businesses & professionals from claiming deductions if a cash payment exceeding ₹10,000 is made to a single person in a single day.
Even if the bill is completely legit… even if you had to pay in cash… even if it was a long-term vendor — the rule remains the same.
Why This Stings
Because disallowed expenses increase taxable income.
Say you paid a supplier ₹22,000 in cash for materials.
That amount simply won’t reduce your profit in the eyes of the tax department.
And this surprises many people because they think:
“But I have the invoice. Isn’t that enough?”
Sadly, not for this particular rule.
Cash Payment Limits: What You Really Need to Remember
A few simple numbers can save you a lot of stress:
- Cash payments over Rs. 10,000 (Rs. 35,000 for goods carriages) aren’t allowed as tax-deductible expenses.
- The rule disallows cash payments over Rs. 10,000 daily for businesses, even if split across smaller amounts.
- For goods vehicles, the limit for cash payments made for hiring, leasing, or plying goods vehicles is Rs. 35,000.
- Payments are checked per day, per person — not per invoice.
Also Read: Disallowance of Certain Expenses Paid to Related Parties
Real-Life Example
A boutique owner buys fabric worth ₹12,000.
Vendor says: “Cash de dijiye, UPI network down hai.”
She pays cash.
Next month the CA sits down with accounts and says, “This deduction won’t be allowed.”"
There’s nothing wrong with the purchase — the mode of payment is the problem.
It’s such a small detail, but one that has large consequences.
Why Does This Rule Exist?
Honestly, the purpose is straightforward:
To reduce large, untraceable cash transactions & promote cleaner financial records.
The government wants payments to happen through methods where there’s a clear audit trail — bank transfers, UPI, cheques, etc.
Whether we like it or not, digital payments make it easier to prove the authenticity of expenses.
How the Tax Department Views Your Payments
The evaluation is simple:
- Who did you pay?
- How much did you pay that day?
- Did the total exceed the limit?
- And was it in cash?
Even two payments of ₹5,500 to the same vendor on the same day count as ₹11,000.
Payments That Count as “Cash”
- Physical cash
- Bearer cheques
- Self-cheques
Payments That Keep You Safe
- UPI
- NEFT / RTGS
- IMPS
- Account-payee cheques
- Net banking
UPI especially has rescued so many people from accidental violations.
Also Read: TDS Disallowance Rules Explained for Businesses and Professionals
Everyday Situations Where People Get Caught
These moments are more common than you think:
1. Daily Wage or Labour Payments
- Contractors often pay in cash. But if one person receives more than ₹10,000 in a day — the deduction is gone.
2. Urgent Material Purchases
- A workshop needs spare parts immediately.
- The supplier insists on cash. If it crosses the limit, it won’t qualify as a deductible expense.
3. Transporter Payments
- Transporters have a higher limit — ₹35,000 — but many still unintentionally exceed it.
4. Advance Payments
- A lot of people forget this:
- Advance paid in cash is also covered.
- The date of payment matters, not the date of invoice.
- I once saw someone lose a deduction because they paid a truck repair shop ₹18,000 in cash during a highway breakdown. It was a genuine emergency… but the law doesn’t make exceptions for such situations unless they fall under very specific conditions.
The Exceptions — Rare but Important
Section 40(3) does allow certain exceptions, such as:
- Payments made in areas without banking facilities
- Payments to the government under certain circumstances
- Payments on bank holidays due to genuine business needs
- Specific legal or regulatory obligations
- Situations where banking systems are genuinely not functional
But honestly, most daily transactions will not fall under these. It's safer not to rely on exceptions unless absolutely necessary.
How To Stay Safe & Fully Compliant
These habits make a huge difference:
- Prefer digital payments for anything above ₹10,000.
- Plan purchases instead of reacting at the last moment.
- Keep a simple list of vendors you pay regularly so you don’t accidentally repeat payments.
- Train staff or helpers — many violations happen because someone else hands over cash “to help.”
- Use UPI even for small vendors; most are comfortable with it now.
Whenever I’ve helped businesses adopt these small changes, their compliance became smoother almost instantly.
Also Read: Deduction Rules for Partner Remuneration & Interest
A Simple Checklist Before Paying in Cash
Ask yourself:
- Is the payment ₹10,000 or less?
- Is it to the same person on the same day?"
- Can I do UPI, IMPS, or bank transfer instead?
- Will paying digitally avoid the risk of losing the deduction?
- Can this wait till banking hours?
This tiny moment of thought can save you stress later.
Conclusion
Section 40(3) isn’t designed to trouble businesses — it’s designed to push everyone toward cleaner, traceable payments. But yes, it can feel inconvenient, especially when cash is the easiest option in real life.
If you simply remember the ₹10,000 rule (and the ₹35,000 limit for goods carriages) & shift bigger payments to digital modes, you’ll avoid unnecessary disallowances. Over time, I’ve noticed that tax rules only feel heavy when we discover them after a mistake. When we know them early, they just become part of the natural rhythm of running a business.
A little awareness today truly saves you from bigger losses tomorrow.
If you ever feel unsure or want someone trustworthy to guide you through deductions, compliance, or anything tax-related, you can always reach out to trusted experts at CallMyCA.com — they make these things surprisingly simple.
