Cash is convenient. For everyday business transactions it is fast, familiar, and often the path of least resistance. But when the amounts get large, that convenience can quietly turn into a tax liability. Under Section 10(2A) of the Inland Revenue Act, a payment of Rs. 500,000 or more that is not made through an approved method can be disallowed as a deduction — and may not be accepted as the cost of an asset — directly affecting your taxable income, your capital allowance claims, and the tax treatment of asset purchases. A 2026 amendment has now widened the list of approved methods, and understanding exactly what counts is the difference between a clean deduction and an unwelcome adjustment at audit.
What the Rs. 500,000 rule covers
The rule applies whenever one person pays another Rs. 500,000 or more in a single day — whether that is one transaction, or a series of transactions relating to a single event. This last point matters more than many businesses realise. Splitting a large payment into several smaller cash payments does not, by itself, take you outside the rule if those payments all relate to the same underlying transaction or event.
In practice, this means you should look at the substance and commercial purpose of a payment, not just the figure printed on each individual voucher. Three cash payments of Rs. 200,000 made on the same day for the same purchase are, in substance, a single Rs. 600,000 payment — and they are treated accordingly.
Approved payment methods
To protect both deductibility and asset-cost recognition, high-value payments should be routed through channels that leave a clear trail. The approved methods include:
- An account payee cheque.
- An account payee bank draft.
- A credit card.
- A debit card.
- An electronic payment system operating through a bank account.
- Depositing cash directly into the bank account of the person entitled to the payment — newly confirmed by the 2026 amendment.
That final method is the key change. Previously, businesses that dealt in cash were caught in an awkward position: the recipient wanted cash, but cash failed the test. The amendment closes that gap by accepting a direct deposit into the payee’s account as a compliant method. The common thread across every approved channel is the same — the payment must be traceable through the banking system and supported by documentary evidence.
Tax consequences of non-compliance
The cost of getting this wrong is concrete, not theoretical. If a payment of Rs. 500,000 or more is not made through an approved method:
- The payer may lose the right to claim it as a deductible expense when calculating income; and
- The amount may not be recognised as the cost of an asset for tax purposes.
Both outcomes push taxable income up. The asset-cost point is easy to overlook but can be expensive — it affects capital allowances and the gain or loss recognised when the asset is later sold. These issues tend to surface during a tax review or audit, and they are hardest to defend precisely when the business cannot produce clean payment records. A disallowed deduction on a payment you genuinely made is a frustrating way to increase your tax bill.
The practical takeaway
Before making any payment of Rs. 500,000 or more, treat it as a compliance checkpoint, not just a transaction:
- Confirm the method is approved before the money moves — not after.
- Retain the evidence: bank confirmations, receipts, invoices, and internal approval records, kept together.
- Update your payment policy so that procurement staff, suppliers, and cash handlers all understand that a large cash payment can trigger a tax disallowance.
As a simple working rule: high-value payments should be routed through documented banking channels, every time. The few minutes it takes to deposit funds into a supplier’s account or issue an account payee cheque is far cheaper than losing the deduction later.
References and source notes
- Inland Revenue Act, No. 24 of 2017 — Section 10(2A).
- Inland Revenue (Amendment) Act, No. 11 of 2026 — Section 3, which amends Section 10(2A) of the principal Act to add depositing cash in the second-mentioned person’s bank account as an accepted payment method, effective 08 May 2023.
This article is intended as general guidance for business owners, directors, and payment-processing teams. It is not a substitute for advice on a specific transaction.
