Finance/Compliance Consultant
67374 Points
Posted on 14 August 2025
Hi Rajat Kumar ji,
You're raising a very important and frequently misunderstood issue regarding cash payments, Income Tax Act limits, and employee reimbursements.
๐ Your Question Summary:
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Employees spend โน60,000–โน70,000 in cash on genuine business expenses.
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These are for things like travel, staff welfare, entertainment, freight, etc.
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The company reimburses the employee (e.g., Ravi) via cash, split into โน10,000 or less per day, over 6 days.
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Entries are made in books properly.
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You're asking:
“Is this method of splitting the cash payment across multiple days correct under Income Tax rules?”
โ
Applicable Provision:
Section 40A(3) of the Income Tax Act:
Any expenditure in cash exceeding โน10,000 in a day to a single person will be disallowed as a deduction.
There’s also Rule 6DD which provides certain exceptions — we’ll touch on that below.
๐ Now, Here's the Catch:
๐ Splitting payments across days does not help if:
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The actual expense happened on a single day, and
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You’re just structuring reimbursement to avoid the โน10,000 limit.
๐ The โน10,000 limit applies to the original payment made, not just how you reimburse it.
๐ Your Case: Let’s Analyze
Example:
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Ravi spends โน32,000 in cash on 1st April for company expenses.
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Company repays him in 4 days: โน8,000/day from April 1 to 4.
โ Accounting Entry:
1-April:
Dr Freight A/c โน15,000
Dr Staff Welfare A/c โน10,000
Dr Other Exp A/c โน7,000
To Ravi (Petty Cash) A/c โน32,000
โ Problem:
Since Ravi spent โน32,000 in cash on a single day, it violates Section 40A(3), even if the reimbursement is split.
๐ Conclusion: Splitting reimbursement does not make the expense allowable if the original cash expense exceeded โน10,000 on a single day.
โ
What is the Correct Way?
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Instruct employees to pay via bank/card/UPI/cheque wherever possible.
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If cash must be used, ensure:
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Use Petty Cash Advances:
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Give Ravi an advance of โน10,000 per day.
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Let him spend and settle small amounts.
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This works better if advance is given before the expense.
โ
Exceptions under Rule 6DD
Under certain genuine, unavoidable circumstances, cash payments over โน10,000/day are allowed, such as:
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Payment in a village with no banking facility.
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Payment to government or statutory bodies under specified conditions.
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Payments made on a bank holiday or during emergency.
However, your case (travel, food, staff welfare) doesn't qualify under these exceptions.
๐ Summary: Is This Correct?
| Scenario |
Status |
| Ravi spends โน32,000 in cash on one day for company |
โ Disallowed under Sec 40A(3) |
| Company repays him in โน8,000/day over 4 days |
โ Still disallowed |
| Advance โน10,000/day before expenses & actual spend < โน10,000/day |
โ
Allowed |
| Expense paid via bank/UPI/cheque |
โ
Allowed |
โ
Recommendation
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Avoid cash reimbursements > โน10,000 per day per person.
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Prefer advances, or instruct employees to use digital modes.
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Keep proper bills, signatures, and vouchers to support claims.
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In audit or scrutiny, Section 40A(3) is a common disallowance area.
Let me know if you want a sample accounting entry or a template for petty cash advance log — happy to help!