Section 188 of the Income-tax Act, 2025 prohibits repayment of any loan, deposit or specified advance of ₹20,000 or more otherwise than by account payee cheque, account payee bank draft in the payee's name, or electronic mode.
What section 188 does
Section 188 is the repayment counterpart to section 185 — the successor to section 269T of the Income-tax Act, 1961. Where section 185 governs taking money, section 188 governs giving it back.
The persons bound are widely described: no branch of a banking company or co-operative bank, and no other company or co-operative society, and no firm or other person may repay in cash. That last phrase brings individuals within it.
The threshold is ₹20,000, tested together with interest payable, and on an aggregate basis across the loans, deposits or specified advances held by that person, individually or jointly, on the date of repayment.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 269T | Bar on repaying loans and deposits in cash | 188(1) |
| 269T, proviso | Bank may credit to the payee's account | 188(2) |
| 269T, second proviso | Government, banks and notified exclusions | 188(3) |
| 271E | Penalty equal to the amount repaid | 453 |
| 269SS | Taking loans and deposits | 185 |
| 269SS/269T definitions | Interpretation for the chapter | 189 |
Section 188 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1) — the prohibition and its three-way test
No branch of a banking company or co-operative bank, and no other company or co-operative society, and no firm or other person, shall repay (a) any loan or deposit made with it, or (b) any specified advance received by it, except through an account payee cheque, an account payee bank draft drawn in the name of the person who made the loan or deposit or paid the advance, or the electronic clearing system or other prescribed electronic mode, where the amount together with interest is ₹20,000 or more on any of three bases: the individual loan, deposit or advance; the aggregate of loans or deposits held by that person on the date of repayment; or the aggregate of specified advances held by that person.
The draft must be in the payee's name
Clause (1)(ii) requires the account payee bank draft to be drawn in the name of the person who made the loan or deposit or paid the specified advance. A draft in a third party's name does not comply, even if the money reaches the right person eventually.
Sub-section (2) — banks may credit the account
A branch of a banking company or co-operative bank may also repay by crediting the loan or deposit to the savings bank account or current account, if any, of the person to whom it is to be repaid, held at that branch. This is a practical carve-out for banks, not a general one.
Sub-section (3) — who is outside the section
The prohibition does not apply to repayment of any loan, deposit or specified advance taken or accepted from (a) the Government; (b) any banking company, post office savings bank or co-operative bank; (c) any corporation established by a Central, State or Provincial Act; (d) any Government company under section 2(45) of the Companies Act, 2013; and (e) any notified institution, association or body.
The penalty and the definitions
Section 453 imposes a penalty equal to the amount repaid in contravention. The meanings of loan, deposit and specified advance for this Chapter are in section 189, drawn from the definitions the 1961 Act carried in sections 269SS, 269ST and 269T.
Worked example
A firm repays amounts during tax year 2026-27.
| Repayment | Breach of section 188? | Why |
|---|---|---|
| ₹18,000 principal in cash, no interest payable, no other balance with that lender | No | Below ₹20,000 on all three tests |
| ₹18,000 principal plus ₹3,000 interest, paid in cash | Yes | The test is the amount together with interest — ₹21,000 |
| ₹15,000 in cash where the same lender also holds another deposit of ₹40,000 with the firm | Yes | The aggregate of deposits held by that person on the date of repayment exceeds ₹20,000 |
| ₹3,00,000 repaid by account payee draft made out to the lender's brother | Yes | Clause (1)(ii) requires the draft in the name of the person who made the loan |
| ₹5,00,000 repaid by a bank branch by crediting the depositor's savings account there | No | Permitted by sub-section (2) |
Row three is the one that surprises people. The repayment itself was only ₹15,000, but the section looks at the aggregate held by that person on the date of repayment. The penalty under section 453 would be ₹15,000 — equal to the amount repaid.
Compliance checklist and due dates
- Include interest when testing the ₹20,000 threshold.
- Check the aggregate of all loans, deposits or specified advances held by that person on the repayment date, individually or jointly.
- Draw any account payee draft in the name of the person who made the loan or deposit.
- Maintain a party-wise ledger so the aggregate position is visible before any cash repayment.
- Remember individuals are covered — 'no firm or other person' in sub-section (1) is deliberately wide.
- Read section 189 for the meanings of loan, deposit and specified advance.
- Document any reasonable cause; section 470 carries that defence.
Common mistakes
- Testing the principal alone and ignoring interest.
- Looking only at the amount being repaid rather than the aggregate held by that person.
- Issuing an account payee draft in someone else's name.
- Assuming the section applies only to companies and firms; individuals are covered.
- Confusing section 188 with section 185 — one governs repayment, the other taking, with separate penalties in sections 453 and 450.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.