Cash Payments explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 40A(3) disallows expenditure where cash payments to a person in a day exceed Rs 10,000 — Rs 35,000 for plying, hiring or leasing goods carriages — and section 40A(3A) deems a later cash payment of an already-allowed liability to be business income.
From the ICAI Guidance Note on Tax Audit (Revised 2026), the concluding edition under the Income-tax Act, 1961. For tax years under the Income-tax Act, 2025 the cash-payment restriction sits in rule 26 of the Income-tax Rules, 2026 with its own exceptions list, and the audit particulars move to Form No. 26 under rule 47.
Section 40A(3) — the disallowance of cash payments
Paragraph 36.2(a): where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank, an account payee bank draft, use of the electronic clearing system through a bank account, or such other electronic mode as may be prescribed, exceeds Rs 10,000, no deduction would be allowed in respect of such expenditure.
For payment made for plying, hiring or leasing of goods carriage, the limit is Rs 35,000 instead of Rs 10,000.
The test is per person, per day, in aggregate. Splitting a Rs 40,000 payment into four vouchers of Rs 10,000 on the same day to the same person does not help — the aggregate governs. Equally, two payments of Rs 9,000 to the same person on different days are outside the limit, and payments of Rs 9,000 each to two different persons on the same day are outside it too. The working paper therefore has to be built on a payee-and-date aggregation, which is why paragraph 36.3 notes that audit tools are available to find out such payments expeditiously and accurately where the data is voluminous. Testing cash payments voucher by voucher will miss the very cases the section is aimed at.
Section 40A(3A) — the deemed income
Paragraph 36.2(b): where an allowance has been made in the assessment for any year in respect of a liability incurred for any expenditure, and subsequently during any previous year the assessee makes payment in respect of it otherwise than by the permitted modes, exceeding Rs 10,000, the payment so made shall be deemed to be the profits and gains of business or profession and chargeable to income tax in that previous year. Again the limit is Rs 35,000 for plying, hiring or leasing of goods carriage.
So the two sub-sections work in opposite directions: 40A(3) denies a deduction in the year of the expenditure; 40A(3A) creates income in the year of a late cash settlement of a liability that was already allowed. Clause 21(d) reports them in two separate tables, (A) and (B), each with serial number, date of payment, nature of payment, amount, and the name and PAN or Aadhaar number of the payee, if available.
The clause has not caught up with the section
Paragraph 36.1 records a mismatch worth knowing about. Sections 40A(3) and 40A(3A) now permit payment by account payee cheque, account payee bank draft, ECS through a bank account, or prescribed electronic modes under Rule 6ABBA. But clause 21(d) asks for particulars of all payments exceeding the limits made otherwise than by way of an account payee cheque or draft, for all expenses whether for goods or services deductible in computing business income.
"The clause has not been amended in light of amendment to section 40A(3) and 40A(3A)."
The Guidance Note's resolution: the tax auditor may take the provisions of sections 40A(3) and 40A(3A) and Rule 6ABBA into account while verifying the reporting and giving his observations in Form No. 3CA or 3CB wherever required — and in such a case, a clarificatory note may be placed in the form. In other words: do not report an ECS or UPI payment among the disallowable cash payments merely because the clause's wording predates the amendment, but explain the basis.
Verifying the cash payments, and the certificate route
Paragraph 36.3: the tax auditor should obtain a list of all cash payments in respect of expenditure exceeding Rs 10,000 — Rs 35,000 for goods carriages, with effect from 1 October 2009 — made during the year, including the list of payments exempted under Rule 6DD with reasons. That list should be verified against the books to ascertain whether the conditions for the specific exemptions in clauses (a) to (l) of Rule 6DD are satisfied. Details of payments which do not satisfy those conditions should be stated under the clause.
Paragraph 36.4 acknowledges the practical limit of that verification: it may not be possible to verify each payment reflected in the bank statement as to the mode used. It is therefore desirable that the tax auditor obtain a suitable certificate from the assessee that the payments referred to in sections 40A(3) and 40A(3A) were made by the permitted modes. And then the condition attached to that reliance:
"Where the tax auditor has relied on the certificate of the assessee, the fact shall be reported as an observation in clause (3) of Form No. 3CA and clause (5) of Form No.3CB, as the case may be."
The Guidance Note even supplies suggested wording: "It is not possible for me/us to verify whether the receipts/payments have been accepted/made otherwise than by an account payee cheque or an account payee bank draft, as necessary evidence is not in the possession of the assessee."
"Reporting based on certificates furnished by the assessee was not mentioned as an observation in clause (3) of Form No. 3CA and clause (5) of Form No. 3CB, as required. Observations/qualifications were provided in notes attached to the report instead of being reported in the relevant clauses of Form No. 3CA/3CB." Both findings are about where the disclosure sits. Relying on the certificate is expressly permitted; failing to say so in the right paragraph of the form is not.
Granularity of reporting
Paragraph 36.5 gives the working paper format: nature and particulars of expenditure · date of payment · payment or aggregate payments made to a person in a day otherwise than by the permitted modes · total amount of expenditure · name and PAN of the payee, if available · remarks.
Paragraph 36.6 allows a fallback: wherever possible, individual items of inadmissible expenses may be given; but where the volume of transactions makes that impossible, the tax auditor may furnish such details under broad heads of account.
Paragraph 36.7 sets the boundary of the clause: items of expenditure in respect of which specific exemption has been given under clauses (a) to (l) of Rule 6DD are not required to be stated under this clause.
Worked example
| Transaction | Position |
|---|---|
| Three cash vouchers of Rs 9,500 each to one supplier on the same day | Aggregate Rs 28,500 exceeds Rs 10,000 — reportable at 21(d)(A) |
| Rs 9,500 cash to the same supplier on three different days | Not caught — the test is per person per day |
| Rs 30,000 cash to a lorry owner for hiring a goods carriage | Within the Rs 35,000 limit |
| Rs 60,000 paid by UPI | A prescribed electronic mode under Rule 6ABBA — not a disallowable cash payment; note the clause's outdated wording |
| Rs 45,000 cash paid this year against a purchase allowed in an earlier assessment | Section 40A(3A) — deemed business income, reported at 21(d)(B) |
| Cash payment to a cultivator within Rule 6DD | Not reported under the clause |
Audit checklist
- Aggregate the cash payments by payee and by day, not by voucher; use audit tools where data is voluminous.
- Apply Rs 35,000 only to plying, hiring or leasing of goods carriage.
- Keep sections 40A(3) and 40A(3A) in separate tables — disallowance versus deemed income.
- Obtain the assessee's list of cash payments including Rule 6DD exemptions with reasons, and test those conditions.
- Exclude Rule 6DD exempt items from the clause.
- Where you rely on a certificate, say so in Para 3 of Form 3CA or Para 5 of Form 3CB — not in a note attached to the report.
- Do not treat Rule 6ABBA electronic mode transfers as cash payments, and add a clarificatory note about the clause's wording.
Common mistakes
- Testing voucher by voucher instead of aggregating per payee per day.
- Applying Rs 35,000 to transport-related payments generally rather than to plying, hiring or leasing of goods carriage.
- Reporting Rule 6DD exempt payments in the clause.
- Relying on a certificate silently, without the Para 3 or Para 5 observation.
- Putting qualifications in an attached note instead of the relevant clause of the form.