Section 188 Income Tax Act 2025: Can Loans, Deposits and Property Advances Be Repaid in Cash?
Section 188 restricts the manner in which certain loans, deposits and specified advances may be repaid. Where the statutory Rs. 20,000 threshold is met, repayment generally must be made through an account payee instrument or an authorised electronic banking mode, rather than cash.
What does Section 188 prohibit?
Under Section 188(1), a branch of a banking company or co-operative bank, another company or co-operative society, a firm or any other person cannot repay a covered loan, deposit or specified advance otherwise than through the permitted payment modes if any of the monetary tests in the provision is met.
The rule applies to the person making the repayment. It also covers a specified advance received in relation to a proposed transfer of immovable property, whether or not the property transfer is ultimately completed.
How is the Rs. 20,000 threshold calculated?
Section 188(1) sets out alternative tests. A prescribed repayment mode is required where any one of the following amounts is Rs. 20,000 or more:
- The particular loan, deposit or specified advance, together with interest, if any, payable on it.
- The aggregate loans or deposits held with the relevant payer on the date of repayment, individually or jointly, together with interest payable.
- The aggregate specified advances received by the payer, individually or jointly, on the repayment date, together with interest payable.
Which repayment modes are permitted?
Where Section 188(1) applies, the prescribed methods are:
- Account payee cheque.
- Account payee bank draft drawn in the name of the person who made the loan or deposit or paid the specified advance.
- Electronic clearing system through a bank account or another electronic mode prescribed under the applicable rules.
Section 188(2) separately permits a branch of a banking company or co-operative bank to repay a loan or deposit by crediting the recipient's savings or current account maintained with that branch. A bearer cheque or ordinary cash payment is not one of the listed methods under Section 188(1).
Which repayments are exempt?
Section 188(3): Excluded payees or sources
The restriction in sub-section (1) does not apply to repayment of a loan, deposit or specified advance taken or accepted from:
- The Government.
- A banking company, post office savings bank or co-operative bank.
- A corporation established by a Central, State or Provincial Act.
- A Government company as defined under Section 2(45) of the Companies Act, 2013.
- Any institution, association, body or class of them notified by the Central Government.
Section 188(4): Special Rs. 2,00,000 limit
The Rs. 20,000 figure in sub-section (1) is replaced by Rs. 2,00,000 for a deposit repaid to a member by a primary agricultural credit society or primary co-operative agricultural and rural development bank, or for a loan repaid by a member to either such institution. This is a narrowly defined exception; it does not raise the general limit for all cooperative societies.
Relevant statutory definitions
What is the penalty for violating Section 188?
Under Section 453 of the Income-tax Act, 2025, if a person repays a covered loan, deposit or specified advance otherwise than in accordance with Section 188, the Assessing Officer may impose a penalty equal to the loan, deposit or specified advance so repaid. The provision uses the word "may"; the statutory procedure and any applicable relief provisions should be examined on the facts.
Practical illustrations
Example 1: Loan repayment of exactly Rs. 20,000
A firm owes a lender Rs. 20,000 and proposes to repay the entire amount in cash. The amount meets the statutory threshold, so the firm should use an account payee instrument or permitted electronic mode.
Example 2: Smaller instalment against a larger balance
A person owes Rs. 60,000 and proposes to repay Rs. 10,000 in cash. The aggregate outstanding loan balance is Rs. 20,000 or more, so the smaller instalment does not, by itself, avoid the restriction.
Example 3: Refund of property booking advance
A builder received Rs. 1,00,000 as a booking advance for a proposed property transfer. The transaction is cancelled and the builder must refund the advance. The specified-advance rules should be applied; repayment through an authorised banking mode is the appropriate compliance approach.
Example 4: Qualifying agricultural cooperative transaction
A qualifying primary agricultural credit society repays a member's deposit of Rs. 1,50,000. Section 188(4) substitutes the Rs. 2,00,000 threshold for this category, provided all conditions are met. Other legal requirements may still govern the transaction.
Frequently asked questions
Can a loan of Rs. 19,000 be repaid in cash?
Section 188 may not restrict that repayment if the individual amount, applicable interest and all relevant aggregate balances remain below Rs. 20,000. Other laws or restrictions may nevertheless apply.
Does the Rs. 20,000 threshold include interest?
Yes. The statutory monetary tests expressly include interest, if any, payable.
Can a property advance be refunded in cash?
A specified advance of Rs. 20,000 or more, or one meeting the relevant aggregate test, must generally be repaid using a permitted mode unless an exception applies.
Does the rule apply to joint loans or deposits?
Yes. Section 188 expressly includes amounts held individually or jointly in its aggregate-balance tests.
What was the corresponding provision under the 1961 Act?
Section 269T of the Income-tax Act, 1961 broadly covered the mode of repayment of certain loans, deposits and specified advances.
Official statutory references
Updated: 10 November 2026. This article is general legal information; verify applicable rules, notifications and facts before taking action.