Income Tax 2025

Appearance

186 (1) ​

No person shall receive two lakh rupees or more––

  • (a) in aggregate from a person in a day; or
  • (b) in respect of a single transaction; or
  • (c) in respect of transactions relating to one event or occasion from a person, except through—
  • (i) an account payee cheque;
  • (ii) account payee bank draft;
  • (iii) electronic clearing system through a bank account; or
  • (iv) any other electronic mode, as prescribed.

(2) Sub-section (1) shall not apply to—

  • (a) any receipt by Government, any banking company, post office savings bank, or co-operative bank;
  • (b) transactions of the nature referred to in section 185;
  • (c) such other persons or class of persons or receipts, as notified by the Central Government.
Explanation

Section Summary: ​

Section 186(1) of the new income tax law in India restricts individuals or entities from receiving ₹2 lakh or more in a single day, for a single transaction, or for transactions related to one event or occasion, unless the payment is made through specified modes. These modes include account payee cheques, account payee bank drafts, electronic clearing systems, or other prescribed electronic methods. The purpose of this section is to promote transparency and traceability in financial transactions, reducing the risk of tax evasion and black money.

Key Changes: ​

  1. Threshold Limit: The threshold for mandatory use of specified payment modes is now ₹2 lakh, which may have been adjusted from previous limits or clarified in the new law.
  2. Scope of Transactions: The section explicitly covers aggregate receipts in a day, single transactions, and transactions related to one event or occasion.
  3. Exemptions: Certain entities, such as the government, banking companies, post office savings banks, and co-operative banks, are exempt from this requirement. Additionally, transactions covered under Section 185 and those notified by the Central Government are also excluded.

Practical Implications: ​

  1. For Individuals and Businesses: Taxpayers must ensure that any receipt of ₹2 lakh or more is made through the specified modes. Cash receipts above this limit are prohibited unless explicitly exempted.
  2. Compliance Burden: Businesses and individuals must maintain proper documentation and ensure that payments are routed through traceable methods to avoid penalties or scrutiny.
  3. Exempt Entities: Government bodies, banks, and other exempt entities are not required to adhere to these restrictions, simplifying their transaction processes.

Critical Concepts: ​

  1. Account Payee Cheque/Draft: A cheque or draft that is payable only to the account of the payee and cannot be endorsed to another party.
  2. Electronic Clearing System: A system that facilitates electronic transfer of funds, such as NEFT, RTGS, or UPI.
  3. Section 185: Refers to transactions that are already regulated under another section of the tax law, which are excluded from the scope of Section 186.

Compliance Steps: ​

  1. Identify Applicable Transactions: Determine if any receipts exceed ₹2 lakh in a day, for a single transaction, or for transactions related to one event.
  2. Use Specified Modes: Ensure that such receipts are made through account payee cheques, drafts, electronic clearing systems, or other prescribed electronic methods.
  3. Maintain Records: Keep proper documentation of all transactions to demonstrate compliance during audits or assessments.
  4. Check for Exemptions: Verify if the transaction falls under the exemptions listed in Section 186(2).

Examples: ​

  1. Single Transaction: A business sells machinery worth ₹2.5 lakh to a customer. The payment must be made through an account payee cheque, draft, or electronic transfer. Cash payment is not allowed.
  2. Aggregate Receipts in a Day: A freelancer receives ₹1.8 lakh from one client and ₹50,000 from another on the same day. Since the total exceeds ₹2 lakh, all payments must be made through specified modes.
  3. Exempt Entity: A co-operative bank receives ₹3 lakh in cash from a customer. This is allowed as co-operative banks are exempt under Section 186(2).

This section ensures financial transparency and discourages cash-based transactions above the specified limit, aligning with broader tax compliance goals.