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Rule 26Published

Rule 26: Cash-payment exceptions

Rule 26 lists circumstances in which the stated section 36 cash-payment disallowance or deemed-profit consequence does not apply. Each exception has its own payee, purpose and evidence conditions.

Official notified Income-tax Rules, 2026

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Bare law

Rule 26 - Cases and circumstances in which a payment or aggregate of payments exceeding ten thousand rupees may be made to a person in a day, otherwise than by specified banking and online mode or through such other electronic mode as provided in rule 48

(1) No disallowance under section 36(4) shall be made and no payment shall be deemed to be the profits and gains of business or profession under section 36(5) where a payment or aggregate of payments made to a person in a day, otherwise than by a specified banking or online mode or through such other electronic mode as provided in rule 48, exceeds ten thousand rupees, in the following cases and circumstances:- (a) where the payment is made to- (i) the Reserve Bank of India or any banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); or (ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959); or (iii) any co-operative bank or land mortgage bank; or (iv) any primary agricultural credit society or any primary credit society as defined under section 56 of the Banking Regulation Act, 1949 (10 of 1949); or (v) the Life Insurance Corporation of India established under section 3 of the Life Insurance Corporation Act, 1956 (31 of 1956); (b) where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender; (c) where the payment is made by- (i) any letter of credit arrangements through a bank; or (ii) a mail or telegraphic transfer through a bank; or (iii) a book adjustment from any account in a bank to any other account in that or any other bank; or (iv) a bill of exchange made payable only to a bank; (d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee; (e) where the payment is made for the purchase of– (i)agricultural or forest produce; or (ii)the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or (iii)fish or fish products; or (iv)the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products; (f) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products; (g) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town; (h) where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed fifty thousand rupees; (i) where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 392, and when such employee– (i) is temporarily posted for a continuous period of fifteen days or more in a place other than his normal place of duty or on a ship; and (ii) does not maintain any account in any bank at such place or ship; (j) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person; (k) where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business.

(2) For the purposes of this rule,– (a) the term "bank", in clause (c) and clause (g), means any bank, banking company or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank not being a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), whether incorporated or not, which is established outside India; and (b) "authorised dealer" or "money changer", in clause (k), means a person authorised as an authorised dealer or a money changer to deal in foreign currency or foreign exchange under any law in force.

Rule breakdown

Start with the payment and the relevant exception

The rule addresses a payment or aggregate payments to a person in a day exceeding ₹10,000 outside the specified banking or online modes or the other electronic modes under Rule 48. It states the exceptions for section 36(4) and (5).

Identify the particular clause before relying on an exception. Multiple payments to the same person on the same day should not be reviewed as though each were the only payment.

Financial institutions, government and specified settlement methods

Clauses (a) to (c) list specified financial institutions, qualifying government payments required in legal tender, and stated settlement methods such as letters of credit, transfers, bank-account adjustments and bills payable only to a bank.

A government payee alone is not the whole clause (b) test: the relevant rules must require legal-tender payment. Clause (d) separately covers adjustment against a liability of the payee for goods or services supplied by the assessee.

Direct producer purchases and cottage industries

Clause (e) covers the listed agricultural, forest, animal-husbandry, dairy, poultry, fish, horticulture and apiculture purchases made to the cultivator, grower or producer. Clause (f) concerns purchases from the producer of products manufactured or processed without power in a cottage industry.

Check who receives the payment and the production facts. A purchase of a listed commodity from any intermediary should not be presented as automatically satisfying the direct-producer condition.

Unbanked locations and employee cases

Clause (g) requires both payment in a village or town not served by any bank on that date and a recipient ordinarily resident or carrying on the stated activity there. The employee terminal-benefit exception in clause (h) has a ₹50,000 aggregate-sums-payable limit.

Clause (i) concerns salary after the stated tax deduction where the employee is temporarily posted continuously for at least 15 days away from the normal place of duty or on a ship and has no bank account at that place or ship. Keep these combined conditions together.

Agents, foreign currency and defined terms

Clause (j) concerns payment to an agent required to make cash payments for goods or services on the payer’s behalf. Clause (k) concerns authorised dealers or money changers purchasing foreign currency or travellers cheques in the normal course of business.

Sub-rule (2) defines bank for clauses (c) and (g), and authorised dealer or money changer for clause (k). An agency label without the required cash-payment circumstances does not complete the clause (j) analysis.

Practical evidence and a comparison

For a direct agricultural-produce purchase, retain records identifying the cultivator or grower, the produce and the payment. For an unbanked-location claim, establish the position on the payment date and the recipient’s relevant connection with that place.

Hypothetical: cash paid for produce to its cultivator and cash paid for the same produce to an unrelated reseller do not have identical clause (e) facts. Assess each case under its actual applicable clause instead of relying only on the commodity name.

Key takeaways

Clause-specific tests

Identify and substantiate the particular exception.

Payee identity matters

Producer, institution, employee and agent conditions differ.

Daily aggregation

The rule’s opening test refers to payments to a person in a day.

Practical checklist

  • Identify the exact clause for every claimed exception.
  • Keep payee, payment-date and purpose evidence.
  • Check combined conditions and aggregate limits.

Avoid

  • Do not assume the nature of a commodity alone establishes the producer exception.
  • Do not treat all government or agent payments alike.

FAQs

Does every cash purchase of agricultural produce qualify?

Clause (e) requires payment to the cultivator, grower or producer of the listed articles, produce or products.

Is every cash payment to government covered?

Clause (b) also requires that the applicable rules require the payment to be made in legal tender.

What is the terminal-benefit limit in clause (h)?

The aggregate of the specified sums payable to the employee or heir must not exceed ₹50,000.

Is every payment to an agent exempted?

Clause (j) concerns an agent required to make payment in cash for goods or services on behalf of the payer.

Glossary

Clause-specific exception
Relief tied to the particular facts and conditions of one of Rule 26’s listed cases.
Daily aggregate
The combined payments to the relevant person in a day considered by the opening provision.

Official sources