title: 40A 3 and 40A 3A: Overview 2025 metatitle: Section 40A3 and 40A3A - Cash Payment Disallowance Rules 2025 type: incometax description: Understand Section 40A3 and 40A3A of the Income Tax Act, their impact on cash payments, exceptions under Rule 6DD, compliance tips, real-world challenges, and FAQs. date: 2025-05-26 lastmod: 2025-08-04T18:00:00+05:30 url: tax/income/section-40a3-40a3a-guide-2025/ button: label: Speak to Tax Expert icon: fas fa-arrow-right url: https://consumer.fincover.com/consult/tax

40A 3 40A 3A: Overview 2025

The Indian Income Tax Act has provisions that are referred to as Section 40A3 and Section 40A3A that determine the allowable business expenses. They were meant to curb evasion of tax and increase transparency in doing businesses by preventing the use of cash to spend above a specified limit. These rules are particularly important in year of assessment 2025-26 when more electronic payments are made by small and large businesses.

So what does Section 40A3 and 40A3A entail, its significance, how it will be put to use and what business owners, accountants and taxpayers in India need to know about it.

Why do Businesses need Section 40A3, and 40A3A?

Both section 40A3 and 40A3A are concerned with cash payments in business. Failure to do so may result in disallowance of a part of your business expenses during your tax assessment and subsequent increase in taxable income and additional taxes. Online sellers, manufacturers, retailers, transporters, and even professionals are advised to be aware of these rules because they can be a surprise later.

What does Section 40A3 say?

Section 40A3 states that any expense of more than Rs 10,000 per day (Rs 35,000 in case of transport operators) made in cash, rather than through an account payee cheque, bank draft, or certain electronic modes, will not be allowed as a deductible expense under Income Tax.

Principle and Section 40 A 3:

• Is applicable on payments of any amount on expenditure that is more than Rs 10,000 per person per day
• Increase of limit to Rs 35,000 only on expenses of plying, hiring or leasing goods carriages
• Payments that are permissible by cheque, banking systems or authorised electronic means
• There is no permission to split payment to avoid the limit
• Failure to comply leads to dis-allowance of the concerned payment of business income calculation

Case in point:
Consider the situation where you are a wholesaler who bought stocks of worth Rs 25,000 a day in cash to a supplier. Your taxable income will go up because section 40A3 will not allow the full amount of Rs 25,000 as a business expense.

What is the Section 40A3A and what makes it different to Section 40A3?

Section 40A3A deals with the case of any outstanding liability that was deducted in the earlier year and the liability is paid in cash in excess of the limit in any later year. This is normally the case when a creditor is paid after the expected time and the payment surpasses the cash limit.

Simply put:

Section 40A3A is concerned with deferred cash payments to the expenses already claimed previously.

The noteworthy aspects and points of Sec. 40A3A are:

• Applies when payment in cash exceeds Rs 10,000 (Rs 35,000 for transport purposes) for a liability already claimed
• Cash payment in a subsequent year will be taken as income of the year in which such payment is made
• Assists in making it sure that late payments on cash are also questioned

Surprisingly, you might not know that… Many small traders unknowingly disallow their own expenses by paying cash for goods in lump sums, just to avail a ‘cash discount,’ without realising the longer-term tax impact.

What are the Exceptions and Permissible Modes of 40A 3 and 40A 3A?

Not all cash dealings in excess of 10,000 are prohibited. Both sections acknowledge some of the exceptions that are specified in Rule 6DD, including:

• Government payments
• Villages without any banking facility Payments
• The payment of bank holidays where the bank services are not available
• Payment on layaway basis, credit cards or accepted online payment systems

Also, payments are possible in the form of:

• Account payee cheque
• Bank draft in the name of account payee
• Electronic clearing system (ECS)
• Electronic modes that are prescribed such as UPI, NEFT, RTGS, credit cards, IMPS and so on

What is the effect of these provisions on the day to day business operations?

Such provisions compel business to formalise their accounting, and use non-cash payment. Digital tracking is now an essential part of compliance in retailers, wholesalers and construction companies as well as online marketplaces.

Does Section 40A3 and 40A3A have any transactions outside its scope?

Yes, personal expenses, capital expenses and expenditure not charged in profit and loss account are not in the direct scope. Nonetheless, they are in charge of most of the business and profession related expenses.

Expert Insight: To structure supplier payments in a compliant manner, a chartered accountant may assist in putting the payments into compliant schedules, particularly where there is an online marketplace that allows digital transactions and invoicing.

What are the Advantages and Disadvantages of 40A3 and 40A3A ?

The business planning can be assisted by having an understanding of practical implications.

Pros:

• Allows open trading and internet trading
• Cuts down the circulation of black money
• Promotes business banking in the rural and urban areas
• Makes record-keeping easy when being tax audited

Cons:

• Be an inconvenience to real small businesses in small localities with little banking
• Sometimes real life difficulty where the only practicable means is cash
• Abuse of exceptions can be subject to punishment or inspection
• The risk of destabilising the unorganised sectors

Comparison Table 40A3 and 40A3A

In a nutshell or in short,

• Business expenses that are paid in cash more than Rs 10,000 per day per individual could be rejected
• Applies to direct and deferred (outstanding) expenses
• Avoid disallowance by using cheques, demand draft, NEFT, UPI or bank transfer
• There are some big exceptions in Rule 6DD
• In financial year 2025, we get increased digital compliance, yet the traditional cash practices continue to pose problems

Frequently Asked Questions (People Also Ask)

What will happen in case I have overpaid cash over the limit?
In case of payment above the cash limit or where the payment does not fall under the exceptions of Rule 6DD, the full amount of the payment shall not be allowed as a deduction of income tax. This implies that you will not get the deduction of such an expense.

Is it possible to divide the costs to make it up to Rs 10,000?
No, it is not allowed to divide the bill or invoice artificially in order to fall below the threshold. Section 40A3 and 40A3A will be complied with by clubbing multiple payments of the same expense.

Do advances to suppliers apply?
Yes, business expenses advances are also covered when there is payment of cash above the mentioned limit except those that are covered by exceptions.

You know? A lot of online marketplaces automatically issue digital receipts, which aids buyers and sellers to comply with documentary requirements under Section 40A3.

Real World Experiences: What are the real world problems posed by Section 40A3 and 40A3A?

Based on personal experience, the businesses in small towns will not have convenient access to banks. An example is, a wholesale buyer of farm produce might not have digital payment configured with all the suppliers in the rural areas. In this case, it is all about planning: stagger payment, use several modes that are compliant, and document the exceptional circumstances.

Establishing supplier relationship may require payment in part by cash because that is how they prefer to be paid. The disallowed part of the expense can be disallowed in that case and therefore businesses are advised to estimate the overall impact of the tax before going ahead.

Under what circumstances does digital payment have to be used to satisfy the Section 40A3?

Any business expense above the limit must be paid through digital payment. Acceptable modes are UPI, NEFT, RTGS or direct bank transfers. These are methods that can be used in at least one of the cities and bigger villages in India.

Expert Insight: There are more suppliers getting UPI payments by the assessment year 2025-26. Most online marketplaces incorporate payment gateways that include all these statutory requirements and automatically record the supporting documentation.

What do I do to prove that I am one who is exempted under Rule 6DD?

You need to keep written records like:

• Receipt of money by the payee
• Remark as to why digital/cheque mode could not be used
• Certificate from the bank (where relevant)
• Photographic evidence (if bank branch was closed etc.)

What happens when a business does not consider these provisions?

Failure to comply exposes one to objections during audit, disallowance of expenses, tax fines and even prosecution under tax evasion. This especially poses a risk in high value cash transactions even in good faith.

Best Practices: What can be done with Section 40A3 and Section 40A3A and make sure that it is not violated?

• Educate salesman and personnel on cash budgets
• Compare the supplier payment facilities and supporting documents using online marketplaces
• This is because before you pay any dues, you should always confirm mode of payment
• Use built in accounting software checks, now many of them automatically indicate probable violations
• Where there is doubt, your tax advisor can be called upon to give case specific advice

Did you know? The digital payment footprints and data analytics are becoming increasingly popular tools used by tax authorities to identify the violation of Sections 40A3 and 40A3A.

People Also Ask (Extended FAQ)

Q1: Will transporters continue to get up to Rs 35,000 in cash on a daily basis?
Yes, that higher limit is only in case of plying, hiring or leasing of goods carriages.

Q2: Are small shopkeepers need to be concerned with 40A3 and 40A3A?
Shopkeepers who declare in their accounts expenses in excess of the limit, purchases, freight, rent, or salaries paid in cash, are obliged.

Q3: Is it possible to claim HRA in cash more than Rs 10,000?
Cash rents above the threshold cannot be claimed as a business expense, unless it meets the criteria under Rule 6DD exemption, in case it is claimed as a business expense.

Q4: Do they include capital costs such as purchase of machinery?
No, these sections generally apply to revenue (profit and loss related) expenses, not to capital expenditure.

Q5: Does 40A3 apply to payments to government?
A lot of payments to governmental bodies, including taxes, are excluded according to Rule 6DD.

The highlights of the Summary

• The section 40A3 denies the cash payments above Rs 10,000 in a day per payee as a business expense unless the exceptions exist
• Section 40A3A deals with deferral of cash settlement of liabilities
• Acceptable electronic channels: UPI, cheque, NEFT, IMPS, RTGS etc.
• Rule 6DD enumerates common sense exclusions of real hardships
• Failure to comply results in more tax liability on your part
• The tax professionals and owners of businesses are required to keep clean verifiable records
• Online marketplaces and payment platforms can be used to facilitate compliance in a more reliable and easier way
• In 2025, the rule is to always confirm with your auditor or accountant before making or accepting any large payment in cash as a business expense as it can prove to be very costly.

Sources:

• Authoritative CBDT Income Tax Notices
• 6DD Rule - List of Exceptions