188 (1)
No branch of a banking company or co-operative bank and no other company or co-operative society and no firm or other person shall repay—
- (a) any loan or deposit made with it; or
- (b) any specified advance received by it, except through––
- (i) an account payee cheque; or
- (ii) account payee bank draft drawn in the name of the person who has made the loan or deposit or paid the specified advance; or
- (iii) by use of electronic clearing system through a bank account, or any other prescribed electronic mode,
if,––
- (A) loan or deposit or specified advance, together with the interest, if any, payable thereon; or
- (B) the aggregate amount of the loans or deposits held by such person with the branch of the banking company or co-operative bank or, as the case may be, the other company or co-operative society or the firm or other person
- (either individually or jointly) on the date of such repayment together with interest, if any, payable thereon; or
- (C) the aggregate amount of the specified advances received by such person (either individually or jointly) on the date of such repayment together with the interest, if any, payable thereon, is twenty thousand rupees or more.
188 (2)
Irrespective of the provision in sub-section (1), a branch of a banking company or co-operative bank, may also make the repayment by crediting such loan or deposit to the savings bank account or current account, if any, with such branch of the person to whom such loan or deposit has to be repaid.
188 (3)
Sub-section (1) shall not apply to repayment of any loan, deposit, or specified advance taken or accepted from—
- (a) Government;
- (b) any banking company, post office savings bank, or co-operative bank;
- (c) any corporation established by a Central, State, or Provincial Act;
- (d) any Government company as defined in section 2(45) of the Companies Act, 2013;
- (e) any institution, association, or body or class of institutions, associations or bodies notified by the Central Government.
185 (4)
In sub-section (1), “two lakh rupees” shall be substituted for “twenty thousand rupees” in the case of any deposit or loan where—
(a) such deposit is paid to a member by a primary agricultural credit society or a primary co-operative agricultural and rural development bank; or
(b) such loan is repaid by a member to a primary agricultural credit society or a primary co-operative agricultural and rural development bank.
185(5)
In this section, “loan or deposit” means any loan or deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company, includes loan or deposit of any nature.
Section Summary:
Section 188 of the new income tax law regulates the repayment of loans, deposits, or specified advances by banks, co-operative banks, companies, co-operative societies, firms, or other individuals. The section mandates that repayments exceeding ₹20,000 (or ₹2 lakh in specific cases) must be made through specific modes, such as account payee cheques, bank drafts, or electronic clearing systems. The purpose is to ensure transparency and traceability in financial transactions, reducing the risk of tax evasion or unaccounted money circulation.
Key Changes:
- Threshold Increase for Specific Cases: The threshold for repayment through prescribed modes has been increased from ₹20,000 to ₹2 lakh for transactions involving primary agricultural credit societies or primary co-operative agricultural and rural development banks.
- Clarification on Repayment Modes: The section explicitly allows repayment through electronic clearing systems or other prescribed electronic modes, reflecting the growing use of digital transactions.
- Exemptions Expanded: The list of entities exempt from these repayment rules has been clarified and expanded to include government bodies, banking companies, and certain notified institutions.
Practical Implications:
- For Taxpayers and Businesses:
- Repayments of loans, deposits, or specified advances exceeding ₹20,000 (or ₹2 lakh in specific cases) must be made through traceable modes like account payee cheques, drafts, or electronic transfers.
- Failure to comply may result in scrutiny by tax authorities, as cash repayments above the threshold are prohibited.
- For Banks and Co-operative Societies:
- Banks and co-operative societies must ensure compliance with the prescribed modes of repayment, especially for agricultural credit societies and rural development banks, where the threshold is higher.
- They must also maintain proper documentation to verify the mode of repayment.
- For Government and Exempt Entities:
- Entities like government bodies, banking companies, and notified institutions are exempt from these rules, simplifying their repayment processes.
Critical Concepts:
- Specified Advance: Refers to any advance received that is not a loan or deposit but is subject to similar repayment rules.
- Account Payee Cheque/Draft: A cheque or draft that can only be deposited into the payee’s bank account, ensuring traceability.
- Electronic Clearing System: A digital payment method that facilitates the transfer of funds between bank accounts electronically.
- Thresholds:
- General threshold: ₹20,000.
- Higher threshold (₹2 lakh): Applies only to repayments involving primary agricultural credit societies or primary co-operative agricultural and rural development banks.
Compliance Steps:
- Identify Applicable Threshold: Determine whether the repayment falls under the ₹20,000 or ₹2 lakh threshold based on the nature of the transaction and the entities involved.
- Use Prescribed Modes: Ensure repayments above the threshold are made through account payee cheques, drafts, or electronic clearing systems.
- Maintain Records: Keep detailed records of repayments, including the mode of payment, to demonstrate compliance during audits.
- Verify Exemptions: Confirm if the repayment involves exempt entities (e.g., government bodies, banking companies) to avoid unnecessary compliance steps.
Examples:
- General Repayment:
- A company repays a loan of ₹50,000 to an individual. Since the amount exceeds ₹20,000, the repayment must be made through an account payee cheque, bank draft, or electronic transfer.
- Agricultural Credit Society:
- A primary agricultural credit society repays a deposit of ₹2.5 lakh to a member. As the threshold for such transactions is ₹2 lakh, the repayment must still be made through the prescribed modes.
- Exempt Entity:
- A government body repays a loan of ₹1 crore to a banking company. Since government bodies are exempt, the repayment can be made in any mode, including cash, without violating Section 188.
This section ensures financial transparency and aligns with the government’s efforts to promote digital transactions and curb tax evasion.