Loans Borrowed or Repaid
Other Than Through Banking Channel
What is Section 106 – Loans Borrowed or Repaid Other Than Through Banking Channel?
Taking a loan from a friend, repaying a business debt in cash, or using a hundi to finance trade — these are everyday practices. But under the proposed Income Tax Bill 2025, loans borrowed or repaid other than through prescribed banking channels can lead to serious consequences: scrutiny notices, penalties, and in some cases, the entire amount being treated as your income.
Section 106 is the provision that specifically deals with this issue. It builds on the foundation laid by Section 69D of the earlier law (which targeted hundi-based transactions) and extends the framework to cover a much wider range of non-banking instruments and payment modes. If you have ever borrowed money via a promissory note, repaid a loan in cash, or financed a business through informal channels — this section is directly relevant to you.
The Easy Return team, under the guidance of CA Sagar Batra, has prepared this detailed guide to help individuals, families, business owners, and MSMEs understand the full scope of Section 106, how it interacts with related sections, and what steps you must take to stay compliant.
Policy Intent: Why Was Section 106 Introduced?
Key Provisions: What Transactions Does Section 106 Cover?
| Type of Transaction | Likely Covered? | Risk Level | Reason |
|---|---|---|---|
| Loan via promissory note (outside banking) | YES | High | Negotiable instrument, no direct banking trail |
| Hundi-based trade financing | YES | Very High | Historically targeted under Section 69D; now under Sec 106 |
| Cash loan repayment above threshold | YES | High | No banking trail; may also attract Section 269T |
| Bearer cheque loan | Likely | Medium-High | Weak traceability; payee not fixed |
| Family loan via NEFT/RTGS with agreement | LOW RISK | Safe | Traceable banking channel + documentation |
| Business loan via account payee cheque | LOW RISK | Safe | Prescribed mode; audit trail available |
| UPI-based loan repayment with records | LOW RISK | Safe | Digital payment compliance; timestamp + identity |
What is a Negotiable Instrument Under This Section?
A negotiable instrument includes documents such as:
When such instruments are used for borrowing or repayment outside proper banking channels, the transaction lacks the traceability that the tax law demands.
What is a Hundi and Why Is It Targeted?
A hundi is a traditional Indian financial instrument used for credit, payment, and money transfer — mostly outside the formal banking system. While it has centuries of history in Indian trade, the absence of banking records makes it impossible for tax authorities to verify source and genuineness. That is why it has been a focus area since Section 69D and continues under the proposed Section 106.
Prescribed vs Non-Prescribed Payment Modes: What Is Safe?
One of the most practical questions taxpayers ask is: which payment methods are safe for taking or repaying a loan? Here is a clear comparison of prescribed banking channels vs non-prescribed modes under the proposed Section 106 framework.
| Payment Mode | Traceability | Safe Under Sec 106? | Safe Under 269SS/269T? | Recommended? |
|---|---|---|---|---|
| NEFT (National Electronic Funds Transfer) | Full bank-to-bank trail | YES | YES | ✓ Highly Recommended |
| RTGS (Real Time Gross Settlement) | Full bank-to-bank trail | YES | YES | ✓ Highly Recommended |
| IMPS (Immediate Payment Service) | Full digital trail | YES | YES | ✓ Highly Recommended |
| UPI (Unified Payments Interface) | Digital trail with timestamp & identity | YES | YES | ✓ Highly Recommended |
| Account Payee Cheque | Named payee; bank-credited | YES | YES | ✓ Recommended |
| Bank Draft (traceable) | Bank-issued; traceable | YES | YES | ✓ Acceptable |
| Bearer Cheque | Weak — no named payee | RISKY | RISKY | ✗ Avoid |
| Promissory Note (outside bank) | None / minimal | HIGH RISK | HIGH RISK | ✗ Avoid |
| Hundi | None | VERY HIGH RISK | VERY HIGH RISK | ✗ Never |
| Cash Repayment | None (above threshold) | HIGH RISK | HIGH RISK | ✗ Avoid above threshold |
Income Calculation & Tax Calculation: Real-World Examples
| Normal Salary Income (per ITR) | ₹8,00,000 |
| Amount borrowed via promissory note (potentially deemed income under Sec 106 / Sec 69D) | + ₹5,00,000 |
| Total Assessed Income | ₹13,00,000 |
| Tax on ₹13,00,000 (approx.) | ₹1,42,500 |
| Tax on ₹8,00,000 (original salary income) | ₹60,000 |
| Additional tax due to deemed income addition | ₹82,500 |
| Penalty under Section 269SS (loan accepted in cash — equal to loan amount) | ₹5,00,000 |
| Total Estimated Exposure (tax + penalty) | ~₹5,82,500+ |
| Cash repayment amount | ₹2,00,000 |
| Penalty under Section 269T (equal to repayment amount) | ₹2,00,000 |
| Potential further scrutiny under Sec 106 | Possible |
| Penalty Exposure (Section 269T alone) | ₹2,00,000 |
| Unexplained cash credit in lender's account | ₹2,00,000 |
| If added to income & taxed at 30% (highest slab, approx.) | ₹60,000 |
| Surcharge & Cess (approx.) | ₹6,240 |
| Lender's Approximate Tax on Unexplained Credit | ~₹66,240 |
| Hundi amount (borrowing) | ₹8,00,000 |
| Deemed income under Section 69D / Section 106 (entire amount potentially added to income) | ₹8,00,000 |
| Tax on ₹8,00,000 addition (30% slab, approx.) | ₹2,40,000 |
| Penalty under Section 269SS (equal to amount accepted) | ₹8,00,000 |
| Penalty under Section 269T (on repayment, if also in cash) | ₹8,00,000 |
| Total Estimated Worst-Case Exposure | ~₹18,40,000+ |
Penalties and Tax Implications Under Section 106 and Related Provisions
| Consequence Type | Applicable When | Potential Financial Impact |
|---|---|---|
| Deemed Income Addition | Transaction outside banking channel; no supporting records; fails genuineness test | Entire loan amount added to taxable income; taxed at applicable slab rate |
| Penalty under Section 269SS | Loan of ₹20,000+ accepted in cash or non-prescribed mode | 100% of loan amount accepted (i.e., equal to sum received) |
| Penalty under Section 269T | Loan of ₹20,000+ repaid in cash or non-prescribed mode | 100% of repayment amount |
| Interest under Section 234A/B/C | Underpayment or late payment of tax after assessment | 1% per month on outstanding tax |
| Tax Scrutiny Notice | Mismatch between ITR, books, and bank records | Costs of compliance, professional fees, and reputational risk |
| Best Judgement Assessment | Missing records; non-cooperation with AO | AO can assess income at discretion — often adversely |
Compliance Requirements: How to Keep Your Loan Transactions Safe
| Provision | Threshold | What Happens Above Threshold |
|---|---|---|
| Section 269SS | ₹20,000 (single or aggregate) | Loan cannot be accepted in cash; penalty equal to amount accepted |
| Section 269T | ₹20,000 (single or aggregate) | Loan cannot be repaid in cash; penalty equal to amount repaid |
| Section 106 | No specific threshold published yet | Any non-prescribed instrument/mode may be covered; await final law |
Common Mistakes That Trigger Income Tax Notices on Loan Transactions
| # | Common Mistake | Why It Triggers Notice | Fix |
|---|---|---|---|
| 1 | Cash loan repayment above ₹20,000 | Direct Section 269T violation; no banking trail | Always repay via NEFT/RTGS/IMPS/UPI |
| 2 | Family loan — no written agreement | Cannot prove genuineness; may be treated as undisclosed income | Sign a simple loan agreement; even for relatives |
| 3 | Loan not disclosed in ITR | Bank credit appears unexplained; AO may add to income | Disclose all loans received in ITR/books |
| 4 | Hundi or promissory note used for trade finance | No banking records; directly under Sec 106 / Sec 69D scope | Replace with account payee instruments or bank transfers |
| 5 | Mismatch between books and bank statements | Different loan amounts / repayment dates raise red flags | Reconcile books, bank, and ITR before filing |
| 6 | Multiple small cash repayments to stay under threshold | Aggregation rules apply; splitting does not help | Always use banking channels regardless of amount |
| 7 | No interest on family/friend loans | Zero-interest loans between non-relatives can be questioned | Charge market-rate interest; document it; issue TDS if applicable |
| 8 | Director loans to company in cash | Triggers both Section 106 and company law scrutiny | Route all director loans via banking channel with board resolution |
How Section 106 Affects MSMEs, Startups, and Freelancers
MSMEs, startups, and freelancers are among the groups most exposed to Section 106 issues on loans borrowed or repaid other than banking channel. Here is why:
Why MSMEs Are at Higher Risk
Many small businesses depend on fast, informal funding — supplier credit, trade hundis, director advances, and bridge loans from friends or family. These transactions are often poorly documented, sometimes in cash, and frequently not properly reflected in books or returns.
Under the proposed framework, this exposes MSMEs to simultaneous risk under Section 106, Section 269SS, Section 269T, and company law provisions.
| Business Type | Common Risk Scenario | Sections at Risk | Easy Return Recommendation |
|---|---|---|---|
| MSME / Trader | Hundi-based inventory financing, cash repayments | Sec 106, 69D, 269SS, 269T | Switch to NEFT/RTGS; maintain supplier ledgers |
| Startup / Private Ltd | Director loans in cash; undocumented shareholder advances | Sec 106, 269SS, Companies Act | Board resolution + bank transfer for every director loan |
| Freelancer / Consultant | Cash repayment of personal loans; undisclosed borrowings | Sec 106, 269T | Disclose all loans in ITR; use UPI/IMPS for repayments |
| Family Business (HUF) | Karta loans, family member advances without agreements | Sec 106, 269SS, 269T | Written agreements; bank-to-bank transfers; maintain HUF books |
| Real Estate / Property Dealer | Cash token advances, hundi-based bridge finance | Sec 106, 69D, 269SS, 269T, Sec 68/69 | All property-related loans through banking channels only |
Interest on Loans and TDS Compliance: What You Must Not Miss
| Scenario | Interest Obligation | TDS Required? | Disclosure in ITR |
|---|---|---|---|
| Loan from relative (0% interest) | None — but document in agreement | No TDS | Yes — disclose loan in Schedule |
| Loan from friend at market rate | Interest payable as per agreement | TDS u/s 194A if >₹40,000 (₹50,000 for seniors) | Yes — both loan and interest |
| Business loan from NBFC/individual | Interest at contracted rate | TDS applicable | Full disclosure in books and ITR |
| Cash loan repaid with interest in cash | Both principal and interest at risk | TDS not deducted = additional default | May be questioned on both Section 269T and TDS default |
Section 106 FAQ: Loans Borrowed or Repaid Other Than Banking Channel
Section 106 is an expected provision dealing with amounts borrowed or repaid through negotiable instruments (like promissory notes), hundis, or modes other than prescribed banking channels such as NEFT, RTGS, IMPS, or UPI.
Any loan borrowed or repaid other than through banking channel may attract tax scrutiny, penalties, or deemed income treatment under this section, depending on the facts and final enacted law.
A loan borrowed other than through a prescribed banking channel may attract:
- deemed income addition — the entire loan amount could be added to your taxable income
- penalty under Section 269SS equal to the loan amount
- scrutiny under Section 106
- in case of hundi, action under Section 69D
The risk is significantly higher when there is no written agreement, no bank trail, and no ITR disclosure.
Cash loan repayment above ₹20,000 is directly prohibited under Section 269T, which can impose a penalty equal to the entire repayment amount.
Under the proposed Section 106, cash repayment of a loan may additionally be flagged for traceability concerns.
Even if the original loan was genuine and properly documented, the mode of repayment alone can create serious legal and financial consequences. Always use NEFT, RTGS, IMPS, or UPI.
Section 269SS primarily restricts the acceptance of loans, deposits, or specified sums in cash above ₹20,000 — it creates a penalty equal to the amount accepted.
Section 106, on the other hand, focuses on the instrument or mode used — specifically targeting negotiable instruments, hundis, and other non-prescribed modes.
The key difference is that:
- Section 269SS is threshold-based and focuses on acceptance
- Section 106 is mode-based and covers both borrowing and repayment
In many cases, both sections will apply to the same transaction.
Yes. Family relationship does not automatically exempt a loan transaction from Section 106, Section 269SS, or Section 269T.
Tax authorities examine whether a transaction is genuine, traceable, and consistent with financial records — regardless of the relationship.
For family loans, always:
- use a written loan agreement
- route the money through banking channels
- maintain a repayment schedule
- disclose the loan in ITR
Do not ignore the notice. Do not respond without professional guidance.
The first step is to understand what the notice specifically asks — whether it is a mere information request or a formal scrutiny or penalty proceeding.
Gather all documentation:
- loan agreement
- bank records
- ITR filings
- ledger entries
Then engage a qualified CA immediately.
CA Sagar Batra and the Easy Return team specialise in income tax notice handling and can help you respond appropriately to protect your interests.
Under Section 269SS, the penalty for accepting a loan, deposit, or specified sum in cash (or non-prescribed mode) above ₹20,000 is equal to the entire amount accepted.
So if you accept a ₹5,00,000 cash loan, the penalty alone is ₹5,00,000 — before any tax on deemed income is calculated.
The only relief available is if the taxpayer can prove genuine hardship or exceptional circumstances, which is assessed case by case.
Yes. NEFT, RTGS, IMPS, and UPI are all prescribed, traceable banking channels that satisfy digital payment compliance requirements under the income tax law.
They create:
- a clear timestamp
- identity trail
- bank-to-bank record
that is easily verifiable.
For any loan transaction above ₹20,000 — and ideally for any amount at all — always use one of these modes and preserve the transaction reference/screenshot as part of your records.
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