Don't lend or borrow more than Rs 20,000 in cash

Make sure you borrow or lend by cheque or bank draft, or you may be levied penalty to the tune of the loan amount

You need Rs 3.5 lakh to pay for your father’s emergency heart surgery and you have to deposit Rs 50,000 in the hospital. The hospital will not accept cheque and your credit card limit is less than Rs 50,000. Your savings account has only Rs 10,000. So, you borrow the remaining Rs 40,000 from your neighbour as it is the middle of the night and the surgery has to be done immediately.

The surgery goes off without a hitch and your father is out of danger. Don’t be surprised if you are asked by the Income Tax (I-T) department to explain the source of funds. And if you say you borrowed money from your neighbour, you may be asked to pay a penalty which could be as high as the amount itself.

And while repaying the amount, it is safer to repay the loan by cheque, draft or direct account transfer; else your neighbour may have to pay a penalty, too.

Section 269SS of the Income Tax Act prohibits any person from taking or accepting from any other person any loan or deposit in any other way than by cheque or bank draft where the amount is more than Rs 20,000. Similarly, Section 269T prohibits the re-payment of any loan or deposit other than by cheque or bank draft, if the amount is more than Rs 20,000.

Earlier, this clause pertained to commercial loans, but now it has been extended to loans between individuals as well.

In such cases the I-T assessing officer can levy penalty as high as the amount itself, says Homi Mistry, partner, Deloitte Haskins and Sells. The whole idea behind this clause is to counteract tax evasion.

“So, it is not advisable to deal in cash and only transact through bank account or cheque even if it is an informal loan to your friend or relative,’’ he says. This does not apply in case of repayment of any loan or deposit taken or accepted from the government, PSU company, bank or post office.

The provisions of this section do not apply in case the two persons have agricultural income and neither is liable to pay income tax, or in other words, does not fall in any tax bracket. While there aren’t too many cases of this clause being levied on individuals, it can be used by the I-T department to catch tax evaders. The idea is to trace the source of cash. If the money is unaccounted for, then those involved will have to pay tax. However, advocate Beni Chatterjee says it is not fair to apply the same principles of a commercial loan to a loan between individuals, where often the terms are not fixed and the loan is not payable on notice. “There could be situations where you need money urgently and a cheque will take two to three days to clear. In such situations people do lend cash to each other. This clause is unfair to individuals,’’ he says.