Transactions seen as red flags by Income Tax Department; can send tax notice

Many taxpayers are dreading after some people complained on their social media handles of getting Income Tax notices. Several transactions could potentially result in the issuance of an Income Tax notice. Presented below are a few of the most prevalent instances:

Huge cash deposits in savings accounts

The Income Tax Department (ITD) diligently monitors all monetary deposits and withdrawals carried out by individuals. Should an individual who holds a savings account deposit an amount exceeding Rs 10 lakh in cash within a fiscal year, the department could potentially issue them a notice, necessitating an explanation for the origin of these funds.

The department has instituted a benchmark of Rs 10 lakh for cash deposits within savings accounts. This implies that any cash deposit surpassing Rs 10 lakh in a savings account throughout a fiscal year will trigger an automatic notification to the department.

Subsequently, the department will launch an inquiry into the provenance of the funds channelled for the deposit. Should the department find the explanation satisfactory, no notice will be dispatched. However, if the explanation fails to meet their standards, an official notice might be sent to the account holder, mandating them to elucidate the source of the funds.

Several factors could lead to the department issuing a notice to an account holder depositing more than Rs 10 lakh in cash within a fiscal year. One of these reasons could be the department’s suspicion that the funds are derived from illicit origins, such as money laundering or tax evasion. Another concern could be the potential involvement of the funds in the financing of terrorism or other illicit activities.

Credit card bills paid in cash in excess of Rs 1 lakh

The department diligently monitors all transactions made through credit cards. If a payment exceeding Rs 1 lakh is made in cash towards your credit card bill within a fiscal year, the department may initiate a notice requesting an explanation for the origin of these funds.

The department has established a benchmark of Rs 1 lakh for cash payments towards credit card bills. In practical terms, this implies that should you make a cash payment exceeding Rs 1 lakh towards your credit card bill in a fiscal year, this transaction will trigger an automatic notification to the department.

Subsequently, the department will initiate an inquiry into the provenance of the funds utilized for the payment. If the department deems the explanation satisfactory, no notice will be dispatched. However, if the provided explanation falls short of their standards, a formal notice might be sent to the cardholder, prompting them to elucidate the source of the funds.

Several factors might lead to the department issuing a notice to a cardholder who makes a cash payment surpassing Rs 1 lakh towards their credit card bill in a fiscal year.

Cash deposit exceeding Rs 10 lakh in bank FDs

The Reserve Bank of India (RBI) has established a cap of Rs 10 lakh for cash deposits into fixed deposits (FDs). This signifies that you are restricted from depositing an amount exceeding Rs 10 lakh in cash within a single FD account during a financial year.

Should you initiate a cash deposit surpassing Rs 10 lakh into a solitary FD account, the bank is mandated to report the transaction to the RBI. Subsequently, the RBI holds the prerogative to scrutinize the origin of these funds and implement suitable measures.

Several rationales underpin the RBI’s imposition of this threshold. One rationale is the prevention of money laundering and other unlawful activities. Additionally, this measure aids in monitoring the flow of capital within the economy.

In circumstances requiring a deposit beyond Rs 10 lakh into an FD account, this can be accomplished through multiple deposits each not exceeding Rs 10 lakh. Alternatively, you can choose to deposit the funds using non-cash methods such as checks or bank transfers.

Importantly, transgressing the Rs 10 lakh ceiling for cash deposits into FDs carries significant ramifications. It could entail a demand for clarifying the origin of the funds and potentially lead to penalties being imposed.

Steep cash infusion in the stock market

The department meticulously monitors all cash investments initiated by individuals. Should your cash investments in mutual funds, stocks, bonds, or debentures exceed Rs 10 lakh within a financial year, the department may issue a notice requiring an account of the origin of these funds.

The department has established a benchmark of Rs 10 lakh for cash investments within these asset categories. In essence, this signifies that any cash investment surpassing Rs 10 lakh within these asset categories in a fiscal year will activate an automatic alert for the ITD.

Subsequently, the department will initiate an inquiry into the provenance of the funds utilized for the investment. Should the department deem the explanation satisfactory, no notice will be dispatched. However, if the provided explanation falls short of their standards, the department might formally notify the investor, demanding a clarification regarding the source of the funds.

Cash transaction above Rs 30 lakh in real estate

The department advises against engaging in cash transactions exceeding Rs 30 lakh within real estate transactions. This precaution is due to the challenges posed by tracking cash transactions, which can potentially facilitate money laundering or tax evasion.

For individuals engaged in property buying or selling, familiarity with the department’s directives concerning cash transactions is crucial. Should you participate in a cash transaction surpassing Rs 30 lakh, you could be called upon to elucidate the origin of the funds. Furthermore, the possibility of facing penalties also exists.