In short: The cash payment limit for contractor bills is ₹10,000 per day, per person, under Section 36(4) of the Income-tax Act 2025 — and crossing it disallows the entire payment as a deduction, not the excess. Where the payment is for hiring or leasing a goods carriage, the figure reads as ₹35,000. On the receiving side, Section 186 bars taking ₹2,00,000 or more in cash from one person in a day or in one transaction, with a penalty equal to the whole sum. A cash loan or deposit of ₹20,000 or more is barred by Section 185, penalty equal to the amount. Keeping cash under 5% of your totals also decides whether your audit threshold is ₹1 crore or ₹10 crore.

The cash payment limit for contractor bills, and why it behaves like a wall

Section 36(4) of the Income-tax Act 2025 is short and unforgiving. Where a payment, or the aggregate of payments, made in a day to a person exceeds ₹10,000 and is not made through a specified banking or online mode, the expenditure by way of such payments is not allowed as a deduction.

Read the last clause slowly, because this is where most owners lose money. The section does not disallow the amount above ₹10,000. It disallows the expenditure made by those payments. Pay a labour supplier ₹45,000 in cash in a single day and you do not lose ₹35,000 of deduction — you lose all ₹45,000.

Cash paid to one person in one day Ordinary payment Goods carriage hire
₹9,500 Allowed Allowed
₹10,000 Allowed — the section says exceeds Allowed
₹10,500 Whole ₹10,500 disallowed Allowed
₹35,000 Whole ₹35,000 disallowed Allowed
₹40,000 Whole ₹40,000 disallowed Whole ₹40,000 disallowed

The unit of measurement is worth fixing in your head: one day, one person. Two different suppliers paid ₹10,000 each on the same day are both inside the limit. One supplier paid ₹6,000 in the morning and ₹6,000 in the afternoon is outside it, because the section aggregates payments made in a day to that person.

The ₹35,000 line, and the machines it does not cover

Section 36(6) is the provision a machine owner should know by heart. It says the figures of ₹10,000 in sub-sections (4) and (5) shall be read as ₹35,000 where the payment is made for plying, hiring or leasing of goods carriages.

That is a real and deliberate relaxation for road transport, and it covers the bills a contractor pays constantly: a tipper hired for a week, a truck engaged to shift material, a dumper taken on hire for a single job. Those payments carry ₹35,000 of daily cash headroom instead of ₹10,000.

What it does not cover is the rest of your yard. The relaxation is tied to the words goods carriage, and a goods carriage is a vehicle for carrying goods. Hiring in an excavator, a backhoe loader, a crane or a soil compactor is not the hire of a goods carriage, so those bills sit back on the ₹10,000 line. An owner who pays a ₹30,000 tipper hire in cash is fine and thinks the same applies to a ₹30,000 excavator hire the following week. It does not — and the price of that assumption is the entire ₹30,000.

If you are hiring machines in regularly, it is worth knowing what the going numbers look like before you argue about the payment mode at all; our equipment rental rate card sets out the per-day and per-hour bands, and TDS on machinery hire charges covers what you must deduct from the same bill.

The trap that arrives a year late

Section 36(5) is the half that catches people who thought they had managed the timing. Where a deduction was taken in an earlier year for a liability, and the payment against that liability is made in a later year in cash exceeding the limit, the payment is deemed to be income under the head profits and gains of business or profession in that later year.

So booking a ₹60,000 repair bill as payable in one year and settling it in cash the next does not sidestep the rule. The deduction stands in the first year and the same amount is added back as income in the second. The ₹35,000 reading applies here too where the liability was for goods carriage hire.

Receiving cash: the ₹2 lakh wall

Everything above is about money going out. Section 186 governs money coming in, and it is stricter in an important way: it is not about deductions at all, it is a flat prohibition with a penalty attached.

No person shall receive ₹2,00,000 or more other than through an account payee cheque, account payee bank draft, electronic clearing through a bank account, or another prescribed electronic mode, where the amount is received:

The three ways the ₹2 lakh is measured
In aggregate from one person in a day
In respect of a single transaction
In respect of transactions relating to one event or occasion from a person

The third limb is the one that surprises owners. Splitting a ₹5,00,000 machine sale into five cash receipts of ₹1,00,000 across five different days does not help, because all five relate to one transaction and one occasion. And the consequence is not a lost deduction — under Section 451 the Assessing Officer may impose a penalty equal to the entire sum received in breach. Receive ₹5,00,000 in cash on one deal and the exposure is ₹5,00,000.

Receipts by the Government, a banking company, a post office savings bank or a co-operative bank are outside the section, as are transactions already covered by Section 185.

Borrowing, and paying back

The third cash line sits on finance rather than trade. Section 185 bars taking or accepting a loan, deposit or specified sum of ₹20,000 or more other than by account payee cheque, account payee draft, electronic clearing or a prescribed electronic mode.

The figure is not tested on the fresh amount alone. The section aggregates the new amount with any earlier loan, deposit or specified sum from the same person that remains unpaid, whether or not it is due. So a ₹15,000 cash top-up from a relative who is already owed ₹10,000 breaches the section even though neither figure reaches ₹20,000 on its own. The penalty under Section 450 equals the amount taken.

Repayment is governed separately by Section 188, which requires account payee instruments for repaying loans, deposits and specified advances, with a penalty under Section 453 equal to the amount repaid. Loans from the Government, banks, co-operative banks, statutory corporations and Government companies fall outside Section 185, so an ordinary machine loan from a bank or an NBFC is not what this provision is aimed at — informal borrowing between businesses is. If margin money is the reason cash is circulating in the first place, the options on equipment finance are a cheaper answer than a penalty equal to the loan.

The 5% test that moves your audit threshold

Cash discipline has one more consequence, and it is the one with the largest rupee value attached. Under Section 63, a business must get its accounts audited where turnover exceeds ₹1 crore. That figure is replaced by ₹10 crore for a person whose cash receipts do not exceed 5% of total receipts and whose cash payments do not exceed 5% of total payments.

Both tests have to hold. A contractor with clean banked receipts but a habit of settling labour and diesel in cash fails on the payment side and stays on the ₹1 crore threshold. The same 5% cash discipline reappears in presumptive taxation for contractors under Section 58, where it is what lifts the turnover ceiling from ₹2 crore to ₹3 crore — so the habit you keep on payments quietly decides two separate thresholds. Registration thresholds on the indirect-tax side work differently again, and the GST registration limit for contractors sets those out separately.

What the section leaves to the Rules

Section 36(7) says sub-sections (4) and (5) shall not apply in cases and circumstances as may be prescribed, having regard to the availability of banking facilities, considerations of business expediency and other relevant factors. That is a genuine carve-out — it is how payments in places without banking access have always been protected — but the list of prescribed cases lives in the Rules, not in the Act, and this piece has not verified that list. It is named here rather than guessed at. If you pay in cash because there is no bank within reach of the site, that is precisely the ground to put to your accountant with the section reference in hand.

A contract cannot make you take cash

One provision runs in the owner’s favour and is almost never quoted. Section 36(8) states that nothing regarding the mode of payment in any other law in force, or in any contract, applies to a payment made through a specified banking or online mode in compliance with sub-sections (4) to (7) — and that no plea may be raised in any suit or proceeding on the ground that payment was not made or tendered in cash.

In practice that removes an argument a payer sometimes tries on: that the contract called for cash, so a bank transfer was not valid tender. It also means you can insist on paying by bank transfer without handing anyone a contractual grievance. Where payment is being delayed rather than disputed, the recovery route is a different one, and contractor payment delay on government work sets out what actually moves money.

The bottom line

Four figures cover almost every cash decision a contractor makes: ₹10,000 a day per person on ordinary payments, ₹35,000 where the bill is for hiring a goods carriage, ₹2,00,000 as the amount you must never receive in cash from one person or one deal, and ₹20,000 on an informal loan. The first two cost you a deduction. The last two carry a penalty equal to the whole amount, which is a different order of risk.

The practical habit is simpler than the sections. Pay by transfer by default, keep a separate note of the few cash payments you do make with the date and the payee, and check any single payment above ₹10,000 against the goods-carriage question before you hand over notes. Owners paying daily wages should read this with labour rate per day in India, since that is where the ₹10,000 line is crossed most often, and anyone bidding for departmental work can scan live government construction and equipment tenders in one place.

Rates, thresholds and prices change — the figures here are those written into Sections 36, 63, 185, 186, 450 and 451 of the Income-tax Act 2025 as in force on the date of writing, and the prescribed exceptions under Section 36(7) are not reproduced because they sit in the Rules. Confirm your own position with a chartered accountant, and confirm current terms with the bank, dealer or insurer before deciding. DesiMachines is not liable for decisions taken on the basis of information that may have changed after publication.