Be ready for Income Tax Notice if you made these High Value Transactions in Year 2023-24

The misconception that cashless transactions are less traceable by the Income Tax Department has evolved as the number of such transactions has increased.

Income Tax Notice on High Value Transactions

Reetu | Feb 27, 2024 |

Be ready for Income Tax Notice if you made these High Value Transactions in Year 2023-24

Be ready for Income Tax Notice if you made these High Value Transactions in Year 2023-24

The misconception that cashless transactions are less traceable by the Income Tax Department has evolved as the number of such transactions has increased. However, this belief is erroneous. This is because banks and other financial institutions must notify the Income Tax Department of any transactions that exceed a certain level.

This includes card payments, UPI transactions, cash deposits, and withdrawals that exceed a specified limit.

The department uses modern data analytics technologies to identify discrepancies between stated income and actual expenses. It may cross-check data from a variety of sources, including bank statements, property records, investment details, and travel records, to create a complete financial profile of individuals.

In addition, it can gather data from external sources such as employers, travel agencies, and stock exchanges to confirm income sources and identify potential anomalies.

This level of scrutiny is useful in suspected cases of tax evasion, allowing the department to launch scrutiny assessments, issue notices, and undertake direct inquiries in order to gather evidence and recover taxes.

The following is a list of common transactions that may result in a tax notice, even if they are made in cash:

Depositing large amounts in Cash in Savings Accounts

Depositing more than Rs.10 lakh in a single or combined financial year attracts the attention of India’s Income Tax Department (ITD). Any cash deposit that exceeds Rs.10 lakh in a financial year (April 1 to March 31) across all of your savings accounts is promptly reported to the ITD.

The Central Board of Direct Taxes (CBDT) mandates banks to record these transactions. Even if the deposit is distributed among various accounts, any total sum above Rs.10 lakh will be highlighted.

Surpassing the Rs.10 lakh limit does not imply tax avoidance, but it does draw attention from the Department. Explaining the source of the deposited funds is required, especially if it does not match your claimed income.

If the answer is deemed inadequate, or if disparities appear in your tax returns, you may face extra inquiry or penalties.

The ITD’s assessment is also influenced by the intended use of the deposited cash. For example, depositing business money into a personal account may raise difficulties. The ITD takes into consideration your entire financial profile, including income sources, expenses, investments, and other key transactions.

Compliance is key; keeping proper records and aligning your tax returns with your revenue and expenses is critical to avoid unnecessary attention.

Fixed Deposits made with Cash

Given the recent increase in fixed deposit (FD) rates, these have become more enticing options for investors, particularly those seeking a consistent and predictable income. The current maximum for reporting cash deposits to the ITD is Rs.10 lakh in a single financial year (April 1 to March 31), regardless of purpose, including fixed deposits.

It is critical to keep track of multiple deposits across many bank accounts. Even if you divide the cash deposit into smaller quantities across multiple accounts, any total amount greater than Rs.10 lakhs would be brought to the attention of authorities.

Surpassing the limit does not necessarily imply tax avoidance, but it does draw the ITD’s notice, needing an explanation for the source of the funds. This scrutiny applies to any fixed deposit that exceeds Rs.10 lakhs.

The Rs.10 lakh restriction is based on the total value of your FD holdings across all accounts and financial institutions, not just the individual deposit amount. Similar to cash deposits, exceeding this threshold may result in queries about the source of funds, especially if it does not match your claimed income.

Purchases of Shares, Mutual Funds and Bonds made in Cash

Investing in bonds, stocks, mutual funds, and debentures with cash transactions may result in an income tax notice if the investment exceeds Rs.10 lakh. In contrast, digital transactions create an online trail for both investors and the ITD.

Surpassing a specific threshold may result in ITD inspection, but it does not guarantee the issue of a tax notice or any wrongdoing. The ITD’s priority is on discovering anomalies between claimed income and spending, rather than discouraging investment through particular thresholds.

Repaying Credit Card bill in Cash

There is no stated rule requiring automatic inspection for cash payments to credit card bills, regardless of quantity. However, if you make a cash payment for a monthly credit card bill that exceeds Rs.1 lakh, the department will automatically inquire about the source of funds.

Surpassing any high-value transaction threshold, including cash payments, may result in a general ITD examination. This study is intended to identify potential discrepancies between your claimed income and expenses and is not limited to credit card bill payments.

Cash Payments related to Properties

In India, when purchasing a property worth more than Rs.30 lakhs, the ITD requires the buyer to reveal the source of the cash used for the acquisition. This measure is intended to combat tax evasion and money laundering.

The current threshold for mandatory declaration of source of funds is Rs.50 lakhs for property acquisitions in urban areas and Rs.20 lakhs in rural areas. However, many states may impose more stringent thresholds, so it is best to check the exact legislation that applies to your region.

You can declare the source of funds by adding it to your registration documents or by submitting Form 26QB to the ITD. Even if the property purchase price is less than the threshold, the Department reserves the right to inquire about the source of money if there are suspicions of anomalies in your income or other activities.

Failure to declare the source of funds can result in penalties, tax assessments, and investigations.

To respond to an ITD notice regarding high-value cash transactions, you must have appropriate proof to back up your claims about the source of funds. These documents could include bank statements, investment records, or inheritance papers.

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