Section 269ST Clarification: Repayment of Loan Installments in Cash

In India, the Income Tax Act, 1961 has laid down specific provisions under Section 269ST to curb the practice of large cash transactions and to promote digital and formal financial transactions. This section prohibits the acceptance of cash payments over a certain threshold to prevent black money circulation. However, it’s important to understand how these provisions apply in different scenarios, especially when it comes to loan repayments.

In this blog, we’ll look into the clarification provided on Section 269ST regarding repayment of loan installments in cash and the implications it has for borrowers and lenders.

What is Section 269ST?

Section 269ST of the Income Tax Act deals with the restriction on cash transactions. According to this section, no person shall accept a payment of ₹2 lakh or more in cash for any of the following:

• Sale of goods or services

• Repayment of loans or advances

• Any other transaction involving the receipt of money

This section was introduced to reduce the use of cash in the economy, discourage unaccounted cash dealings, and promote the use of digital payments. The purpose is to encourage transparency in business transactions and to avoid the generation of black money.

Clarification on Loan Repayment Under Section 269ST

Loan repayments are often a common area of concern regarding cash payments, particularly when the borrower is making monthly or quarterly installments.

The Income Tax Department's clarification under Section 269ST addresses the following:

1. Cash Repayment of Loans and Advances:

   • Repayments of loans or advances (whether secured or unsecured) that exceed ₹2 lakh in cash in a single transaction or in aggregate during the year are prohibited.

   • This means if a borrower repays a loan installment in cash exceeding ₹2 lakh in one installment or cumulatively in a financial year, both the borrower and the lender may face penalties as per Section 271DA.

2. Multiple Loan Installments:

   • If the borrower repays a loan in installments, each installment must be under the ₹2 lakh threshold. If multiple installments in cash exceed ₹2 lakh in aggregate during a financial year, then such repayments will violate the provisions of Section 269ST.

3. Instalment-Based Transactions:

   • The clarification also indicates that loan repayments made in cash, whether for a home loan, personal loan, car loan, or any other kind of loan, are subject to the same rule. Therefore, even if a loan repayment is made in small installments, if the aggregate amount exceeds ₹2 lakh in cash, it would be considered a violation.

4. Penalty for Non-Compliance:

   • If a person accepts cash payments exceeding ₹2 lakh for loan repayments, a penalty under Section 271DA of ₹5,000 per transaction can be levied. This penalty is imposed on the lender, and not the borrower. Therefore, lenders need to be cautious in accepting such payments in cash.

Why This Clarification is Important

This clarification on loan repayments under Section 269ST is particularly important for businesses, financial institutions, and individuals engaged in lending activities. Here's why:

1. Encourages Digital Payments:

   • The aim of Section 269ST is to promote cashless transactions and to encourage the use of bank transfers, cheques, or digital payment methods (such as UPI, RTGS, IMPS, etc.) for repayments, which are traceable and reduce the chances of money laundering.

2. Prevents Black Money Practices:

   • Large cash transactions can sometimes indicate the possibility of black money generation, especially when done repeatedly. This rule is in place to mitigate such practices and to encourage transparency in financial dealings.

3. For Lenders (Banks/Financial Institutions):

   • Financial institutions or lenders need to be cautious when receiving loan repayments in cash. Even if the repayment amount is split into multiple installments, the total sum for the year cannot exceed ₹2 lakh in cash.

   • Financial institutions are required to maintain proper records of these transactions to avoid penalties under Section 271DA.

4. For Borrowers:

   • Borrowers should be aware that any installment repayment above ₹2 lakh in cash may lead to a situation where the lender is penalized, even if the borrower isn’t directly at fault. Therefore, it’s advisable to use electronic transfers (NEFT, IMPS, UPI, etc.) to ensure compliance with the law.

Exceptions to Section 269ST Provisions

There are certain exceptions in which cash payments above ₹2 lakh are permissible under the Income Tax Act, such as:

• Payments made to Government: Cash payments made to the Government of India are exempt from the provisions of Section 269ST.

• Cash received from agricultural transactions: Cash payments related to the sale of agricultural products are generally excluded from these restrictions.

However, loan repayments do not fall under these exemptions, and thus, the ₹2 lakh cap applies to them.

Impact of This Clarification on Loan Agreements

• Lenders (including banks, financial institutions, and individual lenders) need to ensure that any loan agreement explicitly specifies that repayments should be made through non-cash methods to avoid falling into the trap of non-compliance.

• Borrowers should be informed about the limitation on cash transactions and should consider utilizing other methods like cheques, bank transfers, or digital payments to ensure smooth loan repayments.

How Can You Make Loan Repayments in Compliance?

• Use Bank Accounts for Transfers: It’s highly recommended to use cheques, bank transfers, or electronic payment methods such as RTGS, IMPS, UPI, etc., for making loan repayments.

• Maintain Records: Both lenders and borrowers should maintain records of loan repayment transactions, especially if they exceed the threshold, to avoid any issues with the tax authorities.

Conclusion

Section 269ST restricts cash payments exceeding ₹2 lakh for loan repayments in a single transaction or cumulatively over the financial year. This aims to reduce the use of cash in financial transactions and ensure greater transparency. The clarification issued by the Income Tax Department emphasizes that both borrowers and lenders must adhere to these limits to avoid penalties. To ensure compliance, it is recommended to use electronic payment systems for loan repayments and maintain proper documentation.

For lenders and borrowers alike, staying informed about these rules can save them from unnecessary penalties and ensure smooth and compliant financial dealings.

FAQs on Section 269ST and Loan Repayments

1. What is the penalty for violating Section 269ST in loan repayments?

   • A penalty of ₹5,000 per transaction can be levied under Section 271DA if cash payments exceeding ₹2 lakh are accepted for loan repayments.

2. Can I repay my loan in cash if the total repayment amount is less than ₹2 lakh?

   • Yes, you can repay your loan in cash as long as the individual installments do not exceed ₹2 lakh.

3. What payment methods are acceptable for loan repayments under Section 269ST?

   • Bank transfers, cheques, and digital payment methods like IMPS, UPI, and RTGS are acceptable forms of payment that are not subject to Section 269ST restrictions.

4. Are there any exemptions for loan repayments under Section 269ST?

   • No, loan repayments are not exempt from the provisions of Section 269ST, and repayments above ₹2 lakh in cash are prohibited.