Paying drivers and hotels in cash: the ₹10,000-a-day rule

Your tour manager settles the taxi union driver in cash at the end of a Himalayan departure: ₹8,500 a day for eight days, paid in one lump. Your CA, closing FY 2025-26 tax audits before the 21 October 2026 deadline (CBDT Circular 07/2026), flags it. Cash above ₹10,000 to one person in a day is disallowed in full, not just the excess.

It isn't a fine, it's a disallowance: the amount is added to taxable profit and taxed at your normal rate, under what used to be section 40A(3) and from 1 April 2026 is section 36(4) of the Income-tax Act, 2025. It touches every cash-heavy corner of a domestic circuit: union drivers, homestays, porters, guides, the tour manager's float.

Here's the rule as it reads now, which exceptions genuinely help, the goods-vehicle limit, and a worked example with a cash log.

The ₹10,000 rule in one paragraph

Any cash payment, or total of several cash payments, to one person in one day that crosses ₹10,000 loses the deduction in full under section 36(4), aggregated across whichever staff member paid. Exactly ₹10,000 is fine, since the law says "exceeds." The ₹2 lakh cash-receipt rule, now section 186, old section 269ST, carries an actual penalty, and that's on money you receive, not pay out.

The new Act repealed the 1961 law but, under section 536, keeps it applying to proceedings for any tax year that began before 1 April 2026, so cash paid in FY 2025-26 and cash paid from 1 April 2026 carry different labels for the same rule:

What	FY 2025-26 (tested now)	From 1 April 2026
Core disallowance	Section 40A(3)	Section 36(4)
Cash paid later for an old bill	Section 40A(3A)	Section 36(5)
Goods-carriage limit	Second proviso, 40A(3A)	Section 36(6)
Exceptions list	Rule 6DD	Rule 26
Electronic modes list	Rule 6ABBA	Rule 48
Audit report line	Form 3CD, clause 21(d)	Form No. 26, item 30

Full mapping: ICAI's tables for the 2025 Act and the 2026 Rules, or our old-to-new section map for travel agents.

What counts as paying through the bank

The law asks whether you used a specified banking or online mode: defined in section 66(32) as an account payee cheque, an account payee draft, bank ECS, or a mode in Rule 48 (credit card, debit card, net banking, IMPS, UPI, RTGS, NEFT, BHIM Aadhaar Pay, plus certain digital-rupee (CBDC) modes). A bearer or self cheque, and cash deposited into the payee's own account, aren't on this list; the test is the instrument, not whether a bank touched the chain. UPI from your business account to the number on the bill counts, and so does paying later by NEFT once the bill photo arrives.

The ₹35,000 limit is for goods carriages, not your tempo traveller

Section 36(6) raises the limit to ₹35,000 only "for plying, hiring or leasing of goods carriages". Under the Motor Vehicles Act, that means a vehicle built or adapted solely to carry goods, or any vehicle while it is used to carry goods. One used or adapted to carry passengers for hire is a "public service vehicle" instead (Supreme Court, New India Assurance v. Asha Rani, quoting both definitions).

A pickup carrying your group's luggage or camping gear is a goods carriage, so up to ₹35,000 cash to its owner in a day keeps its deduction. The same amount to a tempo traveller, Innova or coach owner carrying your clients is not; that stays at ₹10,000.

One Spiti departure, worked through

Say you run a 12-traveller, 8-day Spiti departure in June 2026 as a partnership firm, income under ₹1 crore. Figures below are illustrative, not quoted union or homestay rates.

Example: 12 travellers at ₹34,000 each: revenue ₹4,08,000. Costs: tempo owner-driver, 8 days at ₹8,500, ₹68,000 cash in one go; Kaza homestay, ₹39,600 cash at checkout; other hotels, ₹1,20,000 by NEFT; dhaba meals, ₹48,000 cash but never over ₹10,000 to one dhaba a day; a luggage pickup, ₹28,000 cash (a goods carriage, under ₹35,000, allowed); a guide, ₹10,000 over 4 days (allowed, never exceeding the line); permits, ₹6,000 online. Total cost ₹3,19,600; real margin ₹88,400.

The tempo and homestay bills each cross ₹10,000 cash to one payee in a day, so both are disallowed in full: ₹1,07,600 added back. Taxable income from this departure: ₹1,96,000. Tax at 31.2% (a firm's 30% under the Finance Act, 2026 plus 4% cess, no surcharge below ₹1 crore of income): ₹61,152, against ₹27,581 if both bills had gone by bank. The two cash settlements alone cost ₹33,571 in extra tax, about 38% of the departure's margin.

The same line catches a subtler mistake: on day 5, the tour manager pays the tempo driver ₹6,000 and the assistant pays him ₹4,500 for diesel. Neither crosses ₹10,000 alone, but together it's ₹10,500 to one person that day, all disallowed; the rule adds up across staff, not one wallet. The fix: pay both by UPI or IMPS to the account on the bill, and the disallowance falls to zero.

The Rule 26 exceptions that can help an operator, and the ones that cannot

Rule 26 of the Income-tax Rules, 2026 lists where section 36(4) doesn't apply. Most cover payments to banks and the Government, farm and cottage producers, or your own employees; the burden of proving you qualify is yours.

Exception	Helps a tour operator?
Payment to a bank, SBI, a co-op bank, LIC	No; not your suppliers
Payment to the Government where its rules require cash	Rarely; only where those rules actually demand legal tender
Bank instrument (LC, bank transfer, book adjustment)	No; already non-cash
Adjustment against what the payee owes you	Sometimes, e.g. a hotel that's bought a package from you
A village or town not served by any bank that day, paid to someone who lives or does business there	Possibly; confirm with your CA
Salary (after TDS) to an employee posted 15+ days away with no bank account there	Possibly, for a salaried tour manager on a long departure
A float handed to your agent for cash payments on your behalf	Covers the handover; treat each onward payment as tested on its own and confirm with your CA
A money changer's own forex purchase	No; that's the money changer's exemption, not yours

Careful: There's no bank-holiday, Sunday or strike exception anymore. That clause was omitted from Rule 6DD with effect from 29 January 2020, and a 2024 tribunal order applied it only because the payment, made on a Sunday in March 2013, came before the omission (ITAT Jodhpur, Seema Parakh v. DCIT). "No signal" or "UPI was down" isn't an exception either, and splitting one bill into cash slices across days just invites questions.

When tribunals have let it go, and why that is not a plan

Courts have deleted 40A(3) disallowances, but only on proof. The Supreme Court's words, quoted by the Gujarat High Court: the section's terms "are not absolute," and you can show why paying by cheque or draft "was not practicable," naming who you paid (Anupam Tele Services v. ITO). There, the principal insisted on cash and the payment was undisputed, but relief was confined to those facts.

The Madras High Court said much the same in 2025, that you must "place satisfactory material before the authorities," and sent the case back to the officer (Abiram Agency v. ITO). A Haj operator's disallowance of over ₹1 crore for cash spent in Saudi Arabia was deleted, but the Revenue took it to the Tribunal, and it held only because the officer, re-examining an earlier year, accepted that the hotels there wouldn't take cheques and the operator paid as the pilgrims' agent (ITAT Mumbai, ITO v. Shabbir Ahmed Shaikh, 2017). That doesn't put cash abroad outside the rule; it was decided on its own facts, years later.

Your auditor asks for a list of every cash payment above the line, including the ones you call exempt, and reports those that don't meet the exception's conditions (ICAI Guidance Note on Tax Audit, para 36.3). The "not practicable" argument happens after, with evidence. It's a defence, not a plan.

If you file under section 58 presumptive tax

Under section 58's presumptive scheme (Income-tax Act, 2025; old 44AD for FY 2025-26), profit is deemed at 6% of banked turnover plus 8% of the rest, or actual profit if higher, for turnover up to ₹2 crore, or ₹3 crore where cash receipts stay at 5% or less. Section 36(4) has nothing to disallow here, since no expense deduction is allowed against that figure.

But section 58 excludes anyone earning commission or brokerage, or carrying on an agency business, so an agency earning ticketing commission can't use it at all; it suits an operator selling its own packages as principal. Declare profit below the deemed rate while income sits above the exemption limit, and you're back to books, audit, and 36(4). For everyone on regular books, heavy cash payments can also cost you the higher audit threshold: the ₹10 crore limit holds only while cash payments stay at 5% or less of all payments, otherwise audit starts above ₹1 crore (the tax-audit turnover guide has the detail).

A per-payee, per-day cash log for domestic circuits

The fix sits upstream of the payment. Collect each vehicle owner's and homestay's UPI ID or account on the booking confirmation, and verify changed details by callback. Pay advances and balances from the business account where you can; give the tour manager a cash float only for small payments, dhabas, porters, chai stops, with a hard cap written down. If staff pay a supplier from a personal UPI account, keep the UPI reference with the bill and reimburse them by bank; whether that chain fully satisfies 36(4) isn't settled, so paying from the business account is safer.

PER-PAYEE, PER-DAY CASH LOG - [Departure name], [Date range]

Rules: Stop at Rs 10,000 cash to one payee a day (Rs 35,000 only for a
goods vehicle, never a passenger cab or tempo). Add up every staff
member's payment to that payee. Never split one bill across days.
Close nightly; flag any crossed line to your CA before the audit.

Date        Payee (UPI as on bill)   What for     Cash paid  Paid by       Today's total
05/06/2026  Tempo driver, Rinchen    Day charge   Rs 6,000   Tour manager  Rs 6,000
05/06/2026  Same driver              Diesel       Rs 4,500   Assistant    Rs 10,500 - FLAG

Tag payments to the same vehicle cost lines you already price, so you see a vendor about to cross the line.

Common questions

Driver ko ₹15,000 cash de sakte hain?

Yes, handing over cash isn't illegal. But if he drives a passenger vehicle, the entire ₹15,000 to him that day loses its deduction, not just the ₹5,000 over the line (only a goods carriage gets the ₹35,000 limit). Pay by UPI or NEFT instead.

Can I pay cash on a Sunday or bank holiday without losing the deduction?

No. That exception was omitted from Rule 6DD with effect from 29 January 2020 and isn't in Rule 26; a holiday is tested like any other day.

What is section 36(4) of the Income-tax Act, 2025?

The provision, in force from 1 April 2026, that denies the deduction for an expense when payments to one person in a day exceed ₹10,000 and don't go through an account payee cheque or draft, ECS or a Rule 48 electronic mode, unless a Rule 26 exception applies. It replaces old section 40A(3).

Do I need to give my PAN if I pay a hotel bill in cash?

Only when the cash to a hotel or restaurant exceeds ₹1,00,000 against a bill or bills at any one time, under Rule 159 of the 2026 Rules. That's separate from the ₹10,000 disallowance rule, which that payment has already crossed, and from the ₹2 lakh cash-receipt rule on money you receive.

The short version

• Cash above ₹10,000 to one payee in a day is disallowed in full (as of October 2026), not just the excess; it's added to taxable profit, not a fine.
• From 1 April 2026 this is section 36(4) and Rule 26; cash paid in FY 2025-26, audited by 21 October 2026, is still tested under old section 40A(3) and Rule 6DD.
• ₹35,000 applies only to goods carriages, never to a tempo traveller, Innova or coach carrying clients.
• Only an account payee cheque/draft, bank ECS, or a Rule 48 mode (UPI, IMPS, NEFT, RTGS, cards) counts as the bank.
• No bank-holiday exception exists anymore; splitting one bill into cash slices across days just invites questions.
• Commission and ticketing agencies can't use section 58 presumptive tax to sidestep this.
• Keep a per-payee, per-day cash log, and flag anything over the line to your CA before the audit.