What is the section 21(s) rule on sales received in cash over Rs. 200,000?

Section 21(s) is a rule about how you are paid, not how you pay. If a customer pays more than Rs. 200,000 against one invoice in cash, or by any route that is neither a banking channel nor digital means, half of the expenditure you claim in respect of that sale is not allowed as a deduction.

What does the law say?

Section 21 of the Income Tax Ordinance, 2001 lists amounts for which “no deduction shall be allowed” when computing income under the head Income from Business. Clause (s), inserted by the Finance Act, 2025, adds this item to the list:

• What is disallowed: fifty percent of the expenditure claimed in respect of a sale.
• When: the taxpayer received payment exceeding Rs. 200,000.
• How the payment arrived: otherwise than through a banking channel or digital means.
• Unit of measurement: a single invoice, whether that invoice contains one transaction or several transactions of supply of goods or provision of services.

Section 20(1) is the general rule that allows business expenditure as a deduction. Section 21 works as an exception to it, so clause (s) takes back part of a deduction that section 20 would otherwise give.

“Digital means” is defined in section 2(17B). The definition covers digital payments and financial services including online payment portals, online interbank fund transfers, online bill or invoice payment services, over the counter digital payment services, and card payments using Point of Sale terminals, QR codes, mobile devices, ATMs, kiosks or other digital payment devices.

How does it work in practice?

The clause looks at the seller’s side of a transaction. A shop, wholesaler, workshop or service business that issues an invoice and receives more than Rs. 200,000 on it in cash is the one affected. The buyer’s deduction for a cash payment is dealt with separately, by clause (l) of the same section, which is covered on the page about cash payments.

In practice the rule turns on three facts for each invoice:

1. How much was received against that invoice.
2. Whether the money came through a banking channel or digital means.
3. What expenditure the business claimed in respect of that sale.

If the first two facts trigger the clause, half of the third figure is added back to business income.

Worked example (illustrative figures)

Tariq runs a building materials store in Gujranwala. Three invoices from tax year 2027, with made-up amounts:

Invoice	Amount	How paid
A	Rs. 450,000	Cash at the counter
B	Rs. 450,000	Online interbank transfer
C	Rs. 180,000	Cash at the counter

Assume, only for this example, that the expenditure Tariq claims in respect of invoice A is the cost of the goods sold on it, Rs. 380,000. The Ordinance does not say how that figure is to be measured (see below).

1. Invoice A: Rs. 450,000 in cash exceeds Rs. 200,000. Disallowed amount = 50% of Rs. 380,000 = Rs. 190,000.
2. Invoice B: paid by online interbank transfer, which is listed in the section 2(17B) definition of digital means. Clause (s) does not apply.
3. Invoice C: Rs. 180,000 in cash does not exceed Rs. 200,000. Clause (s) does not apply.

Tariq’s taxable business income for the year is Rs. 190,000 higher than it would have been without clause (s). The tax on that amount depends on his total income and the rates for individuals, which are covered on a separate page.

What does the text leave unclear?

The clause is short, and several practical questions are not answered in its wording. This page does not resolve them.

• Which expenditure is “claimed in respect of sale”. The clause does not say whether this means only the cost of the goods on that invoice, or also a share of rent, salaries and other overheads. It gives no formula.
• Part cash, part bank. If an invoice of Rs. 450,000 is settled with Rs. 150,000 in cash and Rs. 300,000 by bank transfer, the text does not say whether “payment exceeding two hundred thousand rupees” refers to the cash part alone or to the whole payment.
• “Banking channel”. Section 2(17B) defines digital means, but the definitions in section 2 do not include one for “banking channel”. Clause (l) of section 21 treats online transfers and credit card payments as banking channel transactions, but that proviso is written for clause (l).
• Several invoices to one customer. The test is per single invoice. The clause does not address a sale split into several smaller invoices.
• Timing. The clause does not say how it applies where the invoice is issued in one tax year and the cash is received in another.

Common mistakes

• Treating it as a limit on cash sales. Section 21(s) does not prohibit cash sales. It reduces the deduction for expenditure linked to them.
• Confusing it with clause (l). Clause (l) concerns expenditure you pay other than through the banking channel. Clause (s) concerns sale proceeds you receive.
• Assuming the whole expenditure is lost. The clause disallows fifty percent, not all of it.
• Assuming a card payment counts as cash. Card payments through Point of Sale terminals are named in the definition of digital means.

What to check in the official text

Read clause (s) at the end of section 21 and the definition of digital means in section 2(17B). Compare clause (s) with clause (l) in the same section, which has its own proviso on what counts as the banking channel. Because the clause was added recently, check whether the Board has issued any circular or rules on how the expenditure “in respect of sale” is to be worked out. None is part of the text held here.