Section 185 of the Income-tax Act, 2025 prohibits taking or accepting any loan, deposit or specified sum of ₹20,000 or more except through an account payee cheque, account payee bank draft, electronic clearing system or prescribed electronic mode.
What section 185 does
Section 185 is the cash loan restriction — the successor to section 269SS of the Income-tax Act, 1961. It bites at the moment money is taken or accepted, not when it is repaid, and the penalty for breaching it is severe.
The threshold is ₹20,000, but it is tested three ways: the amount being taken now, the amount of any earlier loan or deposit still unpaid from the same person, or the aggregate of both. A ₹5,000 cash loan can therefore breach the section if ₹18,000 from an earlier loan is still outstanding.
The permitted modes are an account payee cheque, an account payee bank draft, the electronic clearing system through a bank account, or any other prescribed electronic mode. A bearer cheque or an ordinary crossed cheque is not enough.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 269SS | Bar on taking loans and deposits in cash | 185(1) |
| 269SS, proviso | Government, banks and notified bodies excluded | 185(2) |
| 269SS, second proviso | Both parties having only agricultural income | 185(3) |
| 269SS, third proviso | ₹2,00,000 for primary agricultural credit societies | 185(4) |
| 271D | Penalty equal to the amount taken | 450 |
| 269T | Repayment restriction | 188 |
Section 185 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1) — the prohibition and the three-way threshold
No person shall take or accept from another person any loan, deposit or specified sum except through an account payee cheque, account payee bank draft, electronic clearing system through a bank account, or other prescribed electronic mode, if: (i) the amount or aggregate of the loan, deposit or specified sum; or (ii) the amount or aggregate of any previously taken loan, deposit or specified sum from that same person which remains unpaid, whether due for repayment or not, on the date of taking the new amount; or (iii) the aggregate of both, is ₹20,000 or more.
Sub-section (2) — who is outside the section
The prohibition does not apply to loans, deposits or specified sums taken or accepted from or by: (a) the 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 under section 2(45) of the Companies Act, 2013; and (e) any institution, association or body notified by the Central Government.
Sub-section (3) — the agricultural income exception
The prohibition does not apply where both the person taking and the person giving the loan, deposit or specified sum have agricultural income and neither has any income chargeable to tax under the Act. Both conditions must be satisfied by both parties — one taxable party defeats the exception.
Sub-section (4) — ₹2,00,000 for agricultural credit societies
₹2,00,000 is substituted for ₹20,000 where the deposit is accepted by a primary agricultural credit society or a primary co-operative agricultural and rural development bank from its member, or where such a society or bank is the lender in the circumstances described in the sub-section.
The penalty is the whole amount
Section 450 imposes a penalty equal to the amount of the loan, deposit or specified sum taken in contravention. Not a percentage — the entire amount. Section 470 (the successor to section 273B) provides the reasonable cause defence, so the conduct and the reason for using cash are what matter in practice.
Worked example
Four transactions in tax year 2026-27.
| Transaction | Breach of section 185? | Why |
|---|---|---|
| ₹18,000 taken in cash from a friend, nothing outstanding earlier | No | Below ₹20,000 on all three tests |
| A further ₹5,000 in cash from the same friend while the ₹18,000 is unpaid | Yes | Aggregate under clause (1)(iii) is ₹23,000 — penalty under section 450 is ₹5,000 on the amount taken |
| ₹4,00,000 received by bearer cheque as a deposit | Yes | A bearer cheque is not an account payee cheque |
| ₹1,50,000 deposit accepted by a primary agricultural credit society from a member, in cash | No | Sub-section (4) substitutes ₹2,00,000 for that class |
The second row is the trap that catches most taxpayers. The fresh amount was only ₹5,000, but the section looks at what is already unpaid from the same person. And the penalty is not on the excess over ₹20,000 — section 450 imposes a penalty equal to the amount taken in contravention.
Compliance checklist and due dates
- Test every cash receipt against all three limbs — the new amount, the unpaid earlier balance from the same person, and the aggregate.
- Use only an account payee cheque or draft, ECS, or a prescribed electronic mode. A crossed but non-account-payee instrument is treated as cash under related provisions.
- Maintain a party-wise ledger of outstanding loans and deposits so the aggregate test can be applied before accepting money.
- For the agricultural exception in sub-section (3), confirm both parties have only agricultural income.
- Primary agricultural credit societies and PCARDBs should apply the ₹2,00,000 threshold for member deposits.
- Document the reason where cash was unavoidable — section 470 carries the reasonable cause defence.
- Remember repayment is separately restricted by section 188, with its own penalty in section 453.
Common mistakes
- Testing only the fresh amount and ignoring the unpaid earlier balance.
- Accepting a bearer or ordinary crossed cheque and treating it as compliant.
- Assuming the penalty is on the excess over ₹20,000. Section 450 penalises the whole amount taken.
- Applying the agricultural exception where one party has taxable income.
- Overlooking that a 'specified sum' — such as an advance against immovable property — is covered, not just loans and deposits.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.