The Draft Income Tax Rules, 2026 have introduced Rule 26, detailing specific cases where payments exceeding Rs 10,000 in a day made otherwise than through specified banking or prescribed electronic modes, will not trigger disallowance under Sections 36(4) and 36(5) of the Income Tax Act.
The provision brings clarity for businesses, professionals and taxpayers by outlining circumstances in which such payments will continue to be allowed as legitimate business expenditure.
No Disallowance Under Sections 36(4) and 36(5)
As per Rule 26(1), no disallowance shall be made under Section 36(4) and no payment shall be deemed as profits and gains of business or profession under Section 36(5), where payments exceeding Rs 10,000 are made in the specific situations listed below.
Key Exceptions Under Rule 26
1. Payments to Banking and Financial Institutions
Cash payments exceeding Rs 10,000 are permitted when made to:
- Reserve Bank of India
- Banking companies as defined under the Banking Regulation Act, 1949
- State Bank of India and its subsidiary banks
- Co-operative banks and land mortgage banks
- Primary agricultural credit societies and primary credit societies
- Life Insurance Corporation of India
2. Payments to Government
Where payments are required to be made in legal tender as per government rules, such transactions will not attract disallowance.
3. Banking Channel-Based Instruments
Payments made through the following modes are covered:
- Letter of credit arrangements
- Mail or telegraphic transfers via bank
- Book adjustments between bank accounts
- Bills of exchange payable only to a bank
4. Adjustment Against Business Liabilities
Payments made by way of adjustment against any liability incurred by the payee for goods supplied or services rendered by the assessee are exempt.
5. Purchase of Agricultural and Allied Produce
Payments exceeding Rs 10,000 are allowed when made to cultivators, growers or producers for:
- Agricultural or forest produce
- Animal husbandry products (livestock, meat, hides, dairy, poultry)
- Fish or fish products
- Horticulture or apiculture products
6. Cottage Industry Products
Payments made to producers manufacturing or processing goods without the aid of power in a cottage industry are permitted.
7. Areas Without Banking Facilities
Where payment is made in a village or town not served by any bank on the date of payment, to a person ordinarily residing or carrying on business in such location, the exemption applies.
8. Terminal Benefits to Employees (Up to Rs 50,000)
Payments made to an employee or their legal heir in connection with:
- Retirement
- Retrenchment
- Resignation
- Discharge
- Death
are allowed if the aggregate does not exceed Rs 50,000.
9. Salary Payments in Exceptional Situations
Cash salary payments are permitted where:
- TDS has been deducted as per Section 392;
- The employee is temporarily posted for 15 days or more away from their normal place of duty or on a ship;
- The employee does not maintain a bank account at such location.
10. Payments Through Agents
Where a person makes payment to an agent who is required to make cash payments on behalf of the principal for goods or services.
11. Foreign Currency Transactions
Payments made by an authorised dealer or money changer in the normal course of business against purchase of foreign currency or travellers’ cheques are permitted.
Definitions Under Rule 26(2)
- "Bank" includes Indian and certain foreign banks, including those not incorporated in India but established outside India.
- "Authorised dealer" and "money changer" refer to persons authorised under foreign exchange laws to deal in foreign currency or exchange.
Why Rule 26 Matters for Businesses
Rule 26 ensures that genuine commercial transactions, particularly in rural, agricultural and banking-limited areasare not penalised merely due to mode-of-payment constraints.
The draft provision strikes a balance between promoting digital payments and recognising practical business realities, especially in sectors like agriculture, cottage industries and remote operations.
Tax professionals and businesses should closely review these exceptions to ensure compliance under the Draft Income Tax Rules, 2026 once notified.
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