A Comprehensive Guide on Section 40A(3) of the Income Tax Act

Section 40A(3) of the Income Tax Act disallows an individual or an entity to claim cash payments exceeding ₹ 10,000 in a day as a deduction. This Section helps to promote digital payment as failure to claim expenses as deductions will lower the savings on tax payments and encourage individuals and business entities to transact in digital mode.

What Is Section 40A(3) of the Income Tax Act ?

Section 40A(3) is divided into two sub-sections-

1. Section 40A(3)(a)

This provision focuses on individuals who make payments in cash of more than ₹ 10,000 in a single day and cannot claim those payments as deductions when filing income tax returns.

2. Section 40A(3)(b)

This provision deals with organisations that make payments or incur expenses of more than ₹ 10,000 in a day, and businesses cannot claim those payments as deductions and can't enjoy tax benefits.

Which Payment Modes Are Allowed as Per Section 40A(3)?

If an individual or business completes a transaction in the following payment modes, then they can claim those payments as a deduction:

Demand draft
Account payee cheque
ECS or other digital payment modes

Which Are the Exceptional Cases Where Disallowance on Expenses Is Not Applicable?

According to rule 6DD of the IT Act, there are the following exceptional situations when an assessee can claim cash expenses exceeding ₹ 10,000 in a day as deductions:

1. Payments made to –

Reserve Bank of India or other banking institutions recognised under Section 5 clause c of the Banking Regulation Act, 1949
State Bank of India or its subsidiaries, belonging to the non-banking and banking sector
Land mortgage or any cooperative bank
Life Insurance Corporation of India
Primary Agricultural Credit Society or other primary credit society as identified under Section 56 of the Banking Regulation Act, 1949

2. Payment transferred to the Government through legal tender

3. An assessee transfers payment through-

Letter of credit arranged via bank
Telegraphic or mail transfer through a banking institution
Intra-bank or inter-bank transfer of payment
Bills of exchange payable to a banking institution

4. Payments by adjusting amounts against liability of a payee before assessee for the supply of services or goods

5. A taxpayer pays cultivators or producers for purchasing their following produces or products -

Forest or agricultural produce
Produce of poultry farming, animal husbandry, and dairy
Fish products or fish
Horticultural or apicultural products

6. An assessee pays a producer for a product manufactured without the help of power in a cottage industry.

7. Payment is transferred within a town or a village to a resident or professional operating a business or other vocations. Note that no banks are operational on the day when such payment is made.

8. An assessee who makes a payment in the form of gratuity or other terminal benefits to his employee or heir should not exceed ₹ 50,000 when such payments are related to resignation, retirement, death, or discharge of that employee

9. An assessee transfer salary to his employee after removing income tax from salary according to Section 192, and he or she can claim those payments as a deduction when that employee-

Is posted for 15 consecutive days temporarily in a ship or other than his or normal working place
Does not hold a bank account at a ship or any such place

10. An individual makes a payment to his or her agent. The agent will transfer the cash payment in exchange for receiving goods or services on his or her behalf.

11. Money changer or authorised dealer makes a payment for purchasing traveller cheques or foreign currency as a normal business course.

Frequently Asked Questions

✓ What was the previous cash expenditure limit in a day under Section 40A(3) of the Income Tax Act?

Before the Union Budget of 2017 came into effect, the threshold limit of cash payment was ₹ 20,000 in Section 40 A(3) of the ITA.

✓ Does Section 40A(3) allow a deduction for expenses exceeding ₹ 10,000 a day in cash for leasing carriages for transporting goods?

Yes, Section 40A(3) extends the maximum expense limit in a day to ₹ 35,000 (in cash) for leasing carriages to transport goods.

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