Income Tax

Cash Transactions that can attract an Income Tax Notice

Cash transactions are highly discouraged in India due to the amount of tax evasion that takes place. The government introduces various new provisions in the Income Tax Act time and again to limit individuals and businesses amounts of cash. Not just the Income Tax department but also various investment platforms like banks, mutual funds houses etc. have been discouraging cash transactions. In this article, we shall take a look at those cash transactions that can invite an income tax notice.

Limits on amounts of cash

As stated above government places limits on the amounts of cash by introducing various provisions in the income tax act. Such limits are set in order for the income tax department to match the earnings of a person with his investments made and expenses incurred. In case of violation of these limits, it could lead to the financial institution or business entity reporting the transaction to the government and the government issuing an income tax notice to such individual. 

For the last few years, the income tax department^[1] has been working closely with all the other related government departments from which it can get financial information and trace people who spend huge amounts of cash but don’t file ITR or evade taxes.

You should be highly vigilant while making any sort of a high value transaction because the income tax department keeps an eye on such high value transactions. It utilizes various methods and modes to find out whether there has been any high value cash transaction. For instance, if a person invests in stock market through demand draft using cash, the broker would report about the investment in its balance sheet. Therefore you should be aware about the cash transaction limit, and the transactions should be done well within such limit to avoid getting any notice from the authorities. 

What are the types of cash transactions that can attract Income Tax notice?

Some of the cash transactions that can attract income tax notice are as follows:

• Deposits in the savings account

The limit of cash deposit for savings bank account is 1 lakh rupees. In case any deposits in cash exceed such limit, the depositor could receive a notice from the Income Tax Department. Therefore be aware.

• Deposits in the current account

Next comes cash deposits or withdrawals that are more than 50 lakh rupees in aggregate per financial year in all current accounts of a person, which should be reported to the income tax department.

• Deposits made in Fixed Deposits

A fixed deposit may be created with a cash deposit, but in case of cash deposits, more than 10 lakh rupees in a financial year should be reported to the income tax authorities. Such rules also apply to the post office accounts.

• Real Estate Investments in cash

One can buy or sell properties in cash however, the value of cash involved in such transactions should not exceed 30 lakh rupees per transaction. If it’s so, then the registrar of companies shall report the matter to the income tax department.

• Payment of credit card bills

Any credit card bills that is paid through cash of an amount more than 1 lakh rupees per annum should be reported by the credit card company to the government. Those people that use credit cards to transact frequently should be vigilant while paying their credit card bills.

• Investments in Financial Instruments

A company receiving an investor more than 10 lakh rupees towards investment in mutual funds, bonds, debentures or stocks should report it to the tax authorities.

• Payments to businesses or professionals

A business or professional should report any cash receipts of more than 2 lakh rupees that is received for the sale of goods or services. There are various provisions that limit cash transactions for businesses and professionals with respect to various types of expenditure. However, a blanket restriction has been made on receiving cash amount of more than 2 lakh rupees regarding a single transaction, or in respect of transactions from a person regarding an event or aggregate per person per day. 

• Purchase of foreign exchange

A purchase of foreign exchange, including travellers cheque and forex cards, debit cards or credit cards aggregating 10 lakh rupees, is reported to the tax department.  

Conclusion

The income tax department has tightened the rules for public in the last few years when it comes to cash transactions. The department can now send an income tax notice in case of slight violations also. Therefore be aware of the high cash transactions limit in order to avoid any legal trouble.

Read our article: How does Income Tax Department trace your High Value Transactions?