One day cash limit

Hi Rajat Kumar ji,

You're raising a very important and frequently misunderstood issue regarding cash payments, Income Tax Act limits, and employee reimbursements.

🔎 Your Question Summary:

• Employees spend ₹60,000–₹70,000 in cash on genuine business expenses.

• These are for things like travel, staff welfare, entertainment, freight, etc.

• The company reimburses the employee (e.g., Ravi) via cash, split into ₹10,000 or less per day, over 6 days.

• Entries are made in books properly.

• You're asking:

“Is this method of splitting the cash payment across multiple days correct under Income Tax rules?”

✅ Applicable Provision:

Section 40A(3) of the Income Tax Act:

Any expenditure in cash exceeding ₹10,000 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.

🔍 Now, Here's the Catch:

🛑 Splitting payments across days does not help if:

• The actual expense happened on a single day, and

• You’re just structuring reimbursement to avoid the ₹10,000 limit.

👉 The ₹10,000 limit applies to the original payment made, not just how you reimburse it.

🔁 Your Case: Let’s Analyze

Example:

• Ravi spends ₹32,000 in cash on 1st April for company expenses.

• Company repays him in 4 days: ₹8,000/day from April 1 to 4.

✔ Accounting Entry:

1-April:
Dr Freight A/c             ₹15,000  
Dr Staff Welfare A/c       ₹10,000  
Dr Other Exp A/c            ₹7,000  
     To Ravi (Petty Cash) A/c         ₹32,000

❌ Problem:

Since Ravi spent ₹32,000 in cash on a single day, it violates Section 40A(3), even if the reimbursement is split.

📌 Conclusion: Splitting reimbursement does not make the expense allowable if the original cash expense exceeded ₹10,000 on a single day.

✅ What is the Correct Way?

1. Instruct employees to pay via bank/card/UPI/cheque wherever possible.

2. If cash must be used, ensure:

   • No single payment exceeds ₹10,000 in a day to a single person or entity.

3. Use Petty Cash Advances:

   • Give Ravi an advance of ₹10,000 per day.

   • Let him spend and settle small amounts.

   • This works better if advance is given before the expense.

✅ Exceptions under Rule 6DD

Under certain genuine, unavoidable circumstances, cash payments over ₹10,000/day are allowed, such as:

• Payment in a village with no banking facility.

• Payment to government or statutory bodies under specified conditions.

• Payments made on a bank holiday or during emergency.

However, your case (travel, food, staff welfare) doesn't qualify under these exceptions.

📝 Summary: Is This Correct?

✅ Recommendation

• Avoid cash reimbursements > ₹10,000 per day per person.

• Prefer advances, or instruct employees to use digital modes.

• Keep proper bills, signatures, and vouchers to support claims.

• 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!