Tax Guide · 26 June 2026
Section 40A(3): When a Cash Payment Disallows Your Expense
Section 40A(3) of the Income Tax Act disallows a business expense where payment to a single person in a single day exceeds ₹10,000 and is made other than by an account-payee cheque, bank draft, or a prescribed electronic mode. The disallowance is the whole expense, not only the amount above the limit, which is what makes the rule sharp. The threshold is higher, ₹35,000, for payments made for plying, hiring or leasing goods carriages, easing the rule for transport operators. A companion provision, Section 40A(3A), pulls the amount back as income if an expense allowed in one year is later paid in cash above the limit. Rule 6DD lists the situations that are exempt, such as payments where banking facilities are absent. This is the payment side of the cash rules, distinct from Section 269ST, which limits cash receipts on the recipient. The safe path is to route business payments through the bank and keep a clean invoice for each.
By Mr. Harshal Harshe
Last reviewed
26 June 2026
In this section
Answers
- Section 40A(3): When a Cash Payment Disallows Your Expense
- What Is GSTR-1, the GST Return of Outward Supplies?
- What Is GSTR-3B, the Monthly GST Summary Return?
- What Is the Time of Supply Under GST, and When Does Tax Become Due?
- Advance Receipt Under GST: When Do You Issue a Receipt Voucher?
- Credit Note vs Debit Note Under GST: When Do You Issue Each?
- What Is GSTR-2B, and Why Does It Now Decide Your Input Tax Credit?
- What Is the Value of Supply Under Section 15 of the CGST Act?
- What Are the GST Rate Slabs in India After the GST 2.0 Reform?
- Exempt vs Nil-Rated vs Zero-Rated Supply: What Is the Difference?
If I pay a business expense in cash, only the bit above ₹10,000 gets disallowed.
Under Section 40A(3) of the Income Tax Act, a single-day cash payment above ₹10,000 to one person disallows the entire expense, not just the excess.
What does Section 40A(3) actually disallow?
Short answer
It disallows a business expense where a single-day payment to one person exceeds ₹10,000 and is not made by account-payee cheque, draft, or a prescribed electronic mode, under Section 40A(3).
The trigger is the mode and size of the payment, not the size of the expense. Cross ₹10,000 in cash to one person in one day and the deduction for that payment is refused. Because the whole amount is added back to your taxable profit, a ₹40,000 cash payment to a supplier can cost you tax on the full ₹40,000, not on ₹30,000.
Is it only the amount above ₹10,000 that is disallowed?
Short answer
No. The entire payment is disallowed once it crosses the limit, which is what separates this rule from a simple cap.
- Splitting one bill into several sub-₹10,000 cash payments on the same day to the same person does not save it; the day total is tested.
- The limit is per person per day, so the same supplier paid on two different days is judged separately.
- This matters because a habit of paying suppliers in cash can quietly inflate your taxable income across the year.
Are there higher limits or exceptions?
Short answer
Yes; the limit is ₹35,000 for payments for plying, hiring or leasing goods carriages, and Rule 6DD lists specific exempt situations.
- Transport payments get the ₹35,000 ceiling, recognising that goods-carriage operators often deal in cash.
- Rule 6DD covers cases such as payments made where no bank serves the area, or to a producer for certain farm produce.
- Section 40A(3A) goes further, treating an expense allowed earlier as income if you settle it in cash above the limit in a later year.
How does this differ from Section 269ST?
Short answer
Section 40A(3) is the payment side, refusing a deduction to the payer above ₹10,000; Section 269ST is the receipt side, penalising the recipient who accepts ₹2 lakh or more in cash.
- One rule looks at money you pay out, the other at money you take in, so a single cash deal can attract both.
- Routing payments through the bank and issuing a proper invoice keeps you clear of both provisions at once.
- A bank-paid, documented expense is what lets you claim the deduction and keep the audit trail intact.
References & related
Primary sources
- Section 40A(3), Income Tax Act 1961 — Income Tax DepartmentDisallowance of expenditure paid in cash above the prescribed limit.
- Section 40A(3A), Income Tax Act 1961 — Income Tax DepartmentDeeming a later cash payment of an earlier-allowed expense as income.
- Rule 6DD, Income Tax Rules 1962 — Income Tax DepartmentCases where cash payments above the limit are not disallowed.
- Section 269ST, Income Tax Act 1961 — Income Tax DepartmentThe companion cash-receipt limit on the recipient side.
Last reviewed: 26 June 2026