Section 106 of the Income-tax Act, 2025 — Amount Borrowed or Repaid Through a Negotiable Instrument or Hundi

In plain language

What Section 106 actually says

Section 106 of the Income-tax Act, 2025 is an anti-black-money, deeming provision. In plain words, if you borrow money or repay a loan through a hundi or any negotiable instrument — and you do it by any route other than an account payee cheque (or a mode the Central Board of Direct Taxes, CBDT, specifically permits) — then the entire amount is treated as your income in the tax year in which the borrowing or repayment took place.

The section is the 2025 Act's re-write of the old Section 69D of the Income-tax Act, 1961. It sits in the "aggregation of income / unexplained income" group of sections (alongside cash credits, unexplained investments and unexplained money). It is effective from 1 April 2026.

Why this rule exists

A hundi is a traditional Indian credit and money-transfer instrument used in informal (non-banking) trade for centuries. Because a hundi passes hand-to-hand and leaves no bank trail, the source and genuineness of the money are almost impossible for the tax department to verify. To force such lending into a traceable, formal channel, the law says: if you won't route it through an account payee cheque, we will treat the money as your taxable income.

Who it applies to

• The borrower — the borrowed amount is deemed to be his income in the year of borrowing.
• The person repaying — the repaid amount is deemed to be his income in the year of repayment.
• It covers every taxpayer — individuals, HUFs, firms, LLPs and companies — whether or not they maintain regular books.

Key conditions and limits

• Only two triggers: a negotiable instrument (promissory note, bill of exchange, cheque that is not account-payee, etc.) or a hundi.
• The escape hatch is a single approved mode: an account payee cheque drawn on a bank (or any other mode CBDT notifies). Route the loan that way and Section 106 does not bite.
• There is no minimum threshold. Unlike some cash provisions, Section 106 has no ₹20,000 floor — even a small hundi loan is caught.
• Interest is included. The words "including interest thereof" mean the deemed income is principal plus interest paid on the hundi.

Protection against double taxation

Sub-section (2) is a relief. If the borrowed amount was already deemed to be your income when you took the loan, then the same amount will not be taxed a second time when you repay it. So the department cannot hit the same money twice under this section.

How it interacts with other sections

• It works alongside the other deeming sections — cash credits (Sec 102, ex-68), unexplained investments (Sec 103, ex-69), unexplained money (Sec 104, ex-69A) and unexplained expenditure (Sec 105, ex-69C).
• Income deemed under these unexplained-income sections is generally taxed at the special flat rate under Section 194/115BBE-equivalent (about 60% plus surcharge and cess, with no deductions or set-off) — verify the exact section number and rate in the 2025 Act before filing, as this is a punitive rate.

Practical implications

• Never take or repay a business loan on a hundi. Insist on an account payee cheque, NEFT/RTGS or another banking channel with a clear trail.
• Even genuine, fully-disclosed hundi borrowings get taxed — genuineness is not a defence; the mode of transaction alone triggers the deeming.
• Traders in cloth, bullion and commodity mandis, where hundis are still common, are the most exposed — they should migrate fully to banking channels.