Rule 26 of Income 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.
Rule 26 of the Income-tax Rules, 2026 lists eleven cases in which a cash payment exceeding Rs 10,000 to a person in a day is not disallowed under section 36(4) and is not deemed to be business income under section 36(5) of the Income-tax Act, 2025. It replaces rule 6DD of the 1962 Rules.
The rule the exceptions hang from
Under the Income-tax Act, 2025, section 36(4) disallows a business expenditure where a payment or aggregate of payments to a person in a day exceeds ten thousand rupees and is made otherwise than by a specified banking or online mode, or by an electronic mode provided in rule 48. Section 36(5) is the mirror provision that deems such a payment to be profits and gains of business or profession where a liability already allowed is later discharged in cash.
Rule 26 is the safety valve. Where a payment falls in one of its listed cases, no disallowance under section 36(4) shall be made and no payment shall be deemed to be profits and gains under section 36(5) — even though the payment exceeded Rs 10,000 in cash.
It is not per bill or per voucher. Three cash payments of Rs 4,000 each to the same supplier on the same day aggregate to Rs 12,000 and cross the line. Splitting a payment across vouchers on one day does not help; splitting across genuinely different days is a question of fact that an assessing officer is entitled to test.
The eleven exceptions in rule 26(1)
(a) Payments to specified financial institutions
Where payment is made to:
- the Reserve Bank of India or any banking company as defined in section 5(c) of the Banking Regulation Act, 1949;
- the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959;
- any co-operative bank or land mortgage bank;
- any primary agricultural credit society or primary credit society as defined under section 56 of the Banking Regulation Act, 1949; or
- the Life Insurance Corporation of India established under section 3 of the LIC Act, 1956.
(b) Payments to Government in legal tender
Where the payment is made to the Government and, under the rules framed by it, the payment is required to be made in legal tender. The requirement must come from the Government's own rules — a mere preference for cash does not qualify.
(c) Payments through banking instruments
Where payment is made by a letter of credit through a bank; a mail or telegraphic transfer through a bank; a book adjustment from one bank account to another in the same or another bank; or a bill of exchange made payable only to a bank.
(d) Set-off against a liability of the payee
Where the payment is made by way of adjustment against the amount of any liability incurred by the payee for goods supplied or services rendered by the assessee to that payee. This is the classic contra-entry case — no money moves at all.
(e) Purchases from producers of primary produce
Where the payment is for the purchase of:
- agricultural or forest produce; or
- the produce of animal husbandry (including livestock, meat, hides and skins), dairy or poultry farming; or
- fish or fish products; or
- the products of horticulture or apiculture,
and the payment is made to the cultivator, grower or producer of those articles.
Clause (e) protects a payment to the person who actually produced the item. A cash payment of the same amount to a trader, aggregator, commission agent or mandi intermediary is not covered, however agricultural the goods are. This is the most litigated limb of the old rule 6DD and the drafting has been carried across unchanged, so the existing body of reasoning remains directly relevant.
(f) Cottage industry products made without power
Where payment is made for products manufactured or processed without the aid of power in a cottage industry, to the producer of those products. Both conditions must hold — cottage industry and without the aid of power.
(g) Places not served by a bank
Where the payment is made in a village or town which, on the date of the payment, is not served by any bank, to a person who ordinarily resides or carries on business, profession or vocation in that village or town.
Both halves matter: the place must be unbanked on the payment date, and the payee must have a real connection to that place.
(h) Terminal benefits up to Rs 50,000
Where payment is made to an employee of the assessee, or to the heir of such an employee, on or in connection with retirement, retrenchment, resignation, discharge or death, on account of gratuity, retrenchment compensation or similar terminal benefit, and the aggregate of such sums payable to the employee or the heir does not exceed fifty thousand rupees.
(i) Salary to a temporarily posted employee
Where an assessee pays salary to an employee after deducting income-tax in accordance with section 392, and that employee:
- is temporarily posted for a continuous period of fifteen days or more at a place other than his normal place of duty, or on a ship; and
- does not maintain any bank account at that place or on that ship.
Both conditions are cumulative, and the TDS condition is a precondition, not an afterthought.
(j) Payments to an agent who must pay cash
Where payment is made by a person to his agent who is required to make payment in cash for goods or services on behalf of that person.
(k) Foreign currency purchases by authorised dealers
Where payment is made by an authorised dealer or a money changer against the purchase of foreign currency or travellers cheques in the normal course of business.
The two definitions in rule 26(2)
- "Bank", for clauses (c) and (g), means any bank, banking company or society referred to in sub-clauses (i) to (iv) of clause (a), and includes a bank established outside India which is not a banking company under section 5(c) of the Banking Regulation Act, 1949, whether incorporated or not.
- "Authorised dealer" or "money changer", for clause (k), means a person authorised as such to deal in foreign currency or foreign exchange under any law in force.
Rule 6DD and rule 26 compared
| Point | Rule 6DD (1962) | Rule 26 (2026) |
|---|---|---|
| Parent provisions | Section 40A(3) and 40A(3A), Income-tax Act, 1961 | Section 36(4) and section 36(5), Income-tax Act, 2025 |
| Threshold | Rs 10,000 per person per day | Rs 10,000 per person per day (unchanged) |
| Approved electronic modes | Rule 6ABBA | Rule 48 |
| Terminal benefit ceiling | Rs 50,000 | Rs 50,000 (unchanged) |
| Temporary posting period | Fifteen days or more | Fifteen days or more (unchanged) |
| TDS cross-reference for salary | Section 192 | Section 392 |
The substantive position is therefore largely preserved. What changes is the citation — and in an assessment or an appeal, citing rule 6DD for tax year 2026-27 is citing a rule that does not apply to that year.
Worked example
A rice mill pays, on 12 June 2026:
- Rs 48,000 in cash to a farmer for paddy grown on his own land — covered by clause (e), no disallowance;
- Rs 60,000 in cash to a commission agent for paddy sourced from several farmers — not covered; the agent is not the cultivator, grower or producer, so section 36(4) disallows the expenditure;
- Rs 35,000 in cash as gratuity to a retiring watchman — covered by clause (h), being within the Rs 50,000 ceiling;
- Rs 12,000 in cash for diesel from a pump in the district town, which has three bank branches — not covered; clause (g) fails because the town is served by banks.
Total disallowance under section 36(4): Rs 60,000 plus Rs 12,000 = Rs 72,000.
Compliance checklist
- Aggregate cash payments per payee per day before testing the Rs 10,000 line.
- For clause (e), keep evidence that the payee is the cultivator, grower or producer — land records, a producer declaration, or a purchase register capturing the source.
- For clause (g), document that the place had no bank on the payment date.
- For clause (h), track the aggregate terminal benefit per employee against Rs 50,000, not each instalment.
- For clause (i), confirm TDS under section 392 was actually deducted and that the employee had no bank account at the posting location.
- Check whether an electronic mode under rule 48 — including UPI, IMPS, NEFT, RTGS and CBDC wallets — was available; if it was, cash needs a clause in rule 26 to survive.
Common mistakes
- Splitting one day's payment across vouchers. The test aggregates.
- Applying clause (e) to traders and aggregators. It reaches only the producer.
- Assuming "no bank branch nearby" means unbanked. The test is whether the village or town is served by any bank on the payment date.
- Ignoring section 36(5). Paying an already-allowed liability in cash later brings the amount back as income.
- Citing rule 6DD. For tax year 2026-27 onwards the rule is rule 26.