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If you have Rs 500 and Rs 1,000 notes lying with you, there is no reason to panic if you can explain the source of the cash.  Many are grappling on how to declare cash without incurring a tax liability. This article looks at Cash Deposit of Rs 500 and Rs 1000, Tax and Penalty on Cash Deposit based on amount and type of people depositing it.

Demonetization and Tax

While the tax authorities had talked of levying a peak rate of tax and 200% penalty on top of it for any unexplained deposit above Rs 2.5 lakh during November 10 to December 30 period, it was felt that such a move may not have legal backing. To plug those loopholes, the Cabinet on 24 Nov 2016,  have approved amending the Income Tax Act by adding a clause in one of the sections to provide for the tax on an unexplained income during the window. Demonetisation was a big step to uproot black money and corruption but its very purpose would have been defeated if the ill-gotten wealth made way into the system through benami deposits. And taxing them was a way to punish dishonest people. The government plans to bring the amendment for approval during the ongoing winter session of Parliament.

While the tax authorities had talked of levying a peak rate of tax and 200% penalty on top of it for any unexplained deposit above Rs 2.5 lakh during November 10 to December 30 period, it was felt that such a move may not have legal backing. To plug those loopholes, the Cabinet on 24 Nov 2016,  have approved amending the Income Tax Act by adding a clause in one of the sections to provide for the tax on an unexplained income during the window. Cabinet meeting, summoned at a very short notice, cames amid reports of high tax penalty terrifying people from putting their cash savings in the formal banking system. The government plans to bring the amendment for approval during the ongoing winter session of Parliament.

Cash deposits made using the scrapped 500 and 1000 rupee notes above a threshold that are declared to Income Tax authorities may attract

  • A minimum of 50% tax may be levied on unexplained bank deposits 
  • Half of remaining deposits, or 25% of the original deposit, will not be allowed to be withdrawn for four years  Government, they further said, is also contemplating coming out with a bond in which the 25 percent ‘lock-in’ money would be parked and can be withdrawn after 4-years by the depositor.
  • Out of the additional taxes on unexplained and undisclosed deposits, government will create a fund to build rural infrastructure.
  • However, a higher 90% tax and penalty could be imposed if assessees do not declare the unaccounted cash voluntarily.
  • The government has also come up with an income disclosure scheme called the Pradhan Mantri Garib Kalyan Yojana (PMGKY) 2016 which allows people to deposit money in their accounts till April 1, 2017, by paying 50 per cent of the total amount — 30 per cent as tax, 10 per cent as penalty and 33 per cent of the taxed amount– that is 10 per cent — as Garib Kalyan Cess. The duration of the scheme will be announced later. The declarant will get immunity from prosecution under any law.

The tax rate however cannot be the same as charged to honest tax payers. It also could not be the 45 percent tax and penalty charged on hereto undisclosed wealth brought to books using a one-time compliance window under the Income Disclosure Scheme (IDS) that ended on September 30. Since the black money holder did not utilise the government offer to declare his ill-gotten wealth, he should pay a higher rate of tax now and curbs placed on use of that money. The 60 percent tax and penalty had been charged on disclosure of foreign black money scheme last year.

Government on 18th Nov 2016, cautioned Jan Dhan account holders, housewives and artisans that they will be prosecuted under the I-T Act for allowing misuse of their bank accounts through deposit of black money in Rs 500/1,000 notes during the 50-day window till December 30.  The directive comes against the backdrop of reports that some are using other persons’ bank accounts to convert their black money into new denomination notes. In some cases, even rewards are being given to account holder  for allowing such misuse.

The government had earlier said deposits up to Rs 2.50 lakh in bank accounts would not come under tax scrutiny as it is within the tax exemption limit. In the case of Jan Dhan account, the holder can deposit up to Rs 50,000. However, the income tax department has noted that people are under impression that no action will be taken for deposits up to Rs 2.50 lakh during November 9-December 30.

The ministry said “such tax evasion activities can be made subject to income tax and penalty if it is established that the amount deposited in the account was not of the account holder but of somebody else. Also, the person who allows his or her account to be misused for this purpose can be prosecuted for abetment under the Income Tax Act”.

The government has earlier said black money deposited in bank accounts during the 50-day period will be subject to tax, interest and 200 percent penalty.  It asked people not to be lured into conversion of black money and become a partner in the crime of converting black money into white through this method

Cash Deposits to be reported by Banks to Income Tax Dept

The government move to demonetise old currency notes with denominations of Rs 500 and Rs 1,000 is one of the boldest steps taken by the Narendra Modi government. It comes in less than two months of the Income Disclosure Scheme 2016, where people were given an opportunity to declare their unaccounted income and come clean after paying a higher rate of tax on the amount disclosed. There seems to be a strategy and plan at work to tackle the black money menace. As PM  Narendra Modi said “My decision is a little harsh. When I was young, poor people used to ask for ‘kadak’ (strong) tea but it spoils the mood of rich,“.

The Finance ministry has carried out series of advertisements in newspapers assuring people that their hard earned money is safe and depositing junked Rs 500 and Rs 1,000 notes of up to Rs 2.50 lakh in bank accounts will not be reported to the tax department. It has also stated that farm income continues to remain tax free and can be easily deposited in bank. Small businessmen, housewives, artisans, workers can also deposit cash in their accounts without any apprehensions, it has said. On farm income, the official said the tax department will match the acre of land the person has and the deposits made in the bank account to identify any discrepancy.

Banks now have to report total cash deposits during 09 November, 2016 to 30 December, 2016, due to change in Income Tax Law announced on 17 Nov 2016. These would be reflected in AIR of Form 26AS.

  • Twelve lakh fifty thousand rupees(12.5 lakh) or more, in one or more current account of a person. Current accounts were not part of AIR reporting earlier; or 
  • Two lakh fifty thousand rupees(2.5 lakh) or more, in one or more accounts (other than a current account) of a person. Earlier limit for AIR reporting was Rs 10lakhs or more in one financial year

Amendments in Income Tax  are:

  • Amendment in Rule 114B for compulsory quoting of PAN in case of cash deposit exceeding Rs. 50000 in a single day or aggregating to more then Rs.  2.5 lakh during the period from 09.11.2016 till 30.12.2016.
  • Amendment in Rule 114E for filing AIR report as required under section 285BA of Income Tax Act, 1961 wrt reporting by banking company and a cooperative bank

Some Common Questions on Deposit of money due to demonetization

With demonetisation, we can deposit only up to Rs 2.5 lakh into savings bank account. I am a housewife with no taxable income and I do not file my return of income. I have saved Rs 2.2 lakh over past years from the money given by my husband for household expenses and this amount is in high-denomination notes. I have a PAN card. Can I deposit this amount? Do I have to pay any tax? 

You can deposit Rs 2.2 lakh in your savings bank account.The bank will not share this information with the IT department, Rule 114E of IT Rules have been changed. Thus, banks have to give information only if a deposit in savings bank account is of `2.5 lakh or more between 09.11.2016 to 30.12.2016. As your income is below taxable, there will not be any tax liability in your hand as regard the deposit of `2.2 lakh.

I run my proprietary business of Ms. Mehta & Co. out of a retail shop at Bora Bazar, Mumbai. I regularly file my return of income. I sell goods on credit as well as on cash. I receive cash from my retail customers, as well as from offices to which I supply stationery. As per my cash book, I have cash on hand of Rs 4.42 lakh as on Nov 8. Can I deposit it in my current account?

You can deposit the amount in your current account. The bank has to give information to the IT department only if there is deposit of Rs 12.5 lakh or more in the current account between Nov 9 and Dec 30. As you had cash on hand as per books of account, you are entitled to deposit the available cash with you to the extent of the cash on hand in your bank account. Even if the IT department makes enquiry, you will be in a position to explain the source of cash.

I earn monthly salary of Rs 1 lakh, file my return regularly, and deposit every month the salary net of tax in my bank account. I withdraw every month Rs 50,000 for my household expenses, including education and medical expenses of family. By-and-large, every month my expenditure is about Rs 42,000 – Rs 46,000. I have with me Rs 3 lakh in high-denomination notes. This amount is out of my past savings.Can I deposit this amount in my personal savings account? Will there be any enquiry?

If you deposit Rs 3 lakhs in your savings bank account, the information will be sent to the Tax department which will ask you to justify your claim of savings of Rs 3 lakh. Tax officials would probably say that if you had Rs 3 lakh, why did you withdraw Rs 50,000 every month from the bank and did not use your savings. Your claim that Rs 3 lakhs is out of savings may be genuine and reasonable, but you may find it difficult to explain. If possible you may deposit Rs 2.5 lakh (from your savings) into your savings bank account and the balance Rs 50,000 into savings bank account of your wife in order to avoid confrontation with IT officials.

Part E of Form 26AS and Annual Information Return (AIR)

Form 26AS, also called as Annual Statement, is a consolidated tax statement which has all tax related information (TDS, TCS, Refund etc) associated with a PAN. It shows how much of your tax has been received by the government and is consolidated from multiple sources like your salary / pension / interest income etc.

PART E of Form 26AS has Details of AIR Transaction. If you make some high value transactions, such as investment in property and mutual funds, then these transactions are automatically reported to the income tax department by banks and other authorities through Annual Information Return (AIR).  Example of Part E of Form 26AS is shown below

Part E of Form 26AS

Tax and Penalty on Unaccounted Cash

When a person declares unaccounted wealth, as many will be forced to after the government banned notes of Rs 500 and Rs 1,000, he will have to pay both tax and penalty on it. Under the Income Declaration Scheme which ended on 30 September 2016, they would have paid only 45% tax and no questions asked. Now they will have to answer a lot of questions and pay a higher tax. Even then, there is no immunity from prosecution. Following image shows tax and penalty on cash deposited. The calculations assume that the taxpayer is an individual below the age of 60, the income-tax rate applicable is for assessment year 2017-18 and the penalty applicable is calculated as under Section 270A of the Income Tax Act, 1961, for misreporting.

Income Tax and Penalty on Cash Deposit

Income Tax and Penalty on Cash Deposited

Tax on Unaccounted Cash

If the amount is unaccounted for, various provisions of Income-Tax Act, 1961, will come into effect. If the sources of income are unaccounted for, these would be deemed to be current year’s income under Section 69A of the Income-Tax Act, 1961, and will attract income tax at the rate of 30% along with applicable surcharge and education cess, under Section 115BBE of the Act,

Penalty on Unaccounted Cash

Any unaccounted income would attract penalty under Section 270A of the Act, which can range from 50- 200% of evaded tax. The tax defaulter could also attract prosecution under Section 276C of the Act, with imprisonment from three months to seven years with fine.  The penalty rate was revised from 100% to 300% in the last Budget to reduce litigation from assessees. The 50% penalty will be levied in cases of under-reported income, while 200% in case of misreporting income (doubled).
Misreporting of income invites a penalty of 200% of the tax payable under the new Section 270(A) of the Income Tax Act. Those depositing Rs 3-5 lakh will not face too much problems because the tax and penalty will be within reasonable limits. But those with a larger sum may have to pay a huge sum as penalty. The effective tax for someone depositing Rs 20 lakh is 63.5% and it keeps rising as the amount increases.
The penalty will be based on a case-by-case basis. Initially, those sitting on unaccounted cash can just deposit the amount in bank and pay the tax incidence, say 30%. The I-T department, based on the available information, will look at these on a case-by-case basis,” said a senior finance ministry official.
Some consultants feel that for such assessees, penalty will arise when it comes to the notice of the I-T department. One could also appeal to tax authorities for taking a lenient view and keep the penalties at the minimum. However, some tax experts feel any move to bring unaccounted for income into the fold of the banking system would be an unwise one as it will open up the assessee to scrutiny of income sources of previous years. “Why would you open the Pandora’s box for yourself?”

How to Deposit Cash without incurring a tax liability

After withdrawing old Rs 500 and Rs 1,000 notes, the government has allowed the banned notes to be deposited in bank accounts or exchanged for new legal tenders till 30 December 2016.  You can go and deposit it in your bank or exchange it for new notes . But, as tax officials have repeatedly warned, the cash you deposit in the bank must match the income declared in your tax return.  So If you have Rs 500 and Rs 1,000 notes lying with you, there is no reason to panic if you can explain the source of the cash.  This has led to cash balances popping up in millions of Jan Dhan accounts, opened under a government scheme for beneficiaries to get their entitlements like LPG subsidy. Income Tax Department is also collating data on spurt in deposits in zero- balance Jan Dhan accounts and will slap a 200% penalty on unexplained high value cash deposits.

Chartered accountants and tax consultants are in high demand as people with cash seek ways to get around the ban on high denomination notes. Tax professionals are charging anywhere between 5% and 25% to suggest strategies that can convert unaccounted cash into legitimate money, which can then be safely deposited in the bank account

“We would get the details of accounts in which more than Rs 2.5 lakh have been deposited. Any mismatch with income declared by the account holder will be treated as a case of tax evasion,” Revenue Secretary Hasmukh Adhia  said in Nov 2016 after demonetization.

Cash Deposit based on Amount

Let us understand the type of depositors and the chances of penalty imposition upon them.

Cash Deposit Up to 2.5 lakh:

The first category of person is those who have deposited cash up to 2.5 lakh. This category doesn’t have to worry about. As Prime Minister/finance minister has said that we will not go to disturb or ask any question on deposit up to 2.5 lakh.

Cash Deposit Up to 10 Lakh: 

Most of the middle class are covered under this point. They have saved their hard earned money over the years for daughter marriage, or someone may have saved it purchase a small house. Though the government will be keeping an eye on this category as well, however, there are little chances that government will interfere in this category.

Also, people may deposit this sum breaking into the smaller sum of 2.5 lakh and may deposit it in the name of family members which is also a lot of people may already be doing. Further, the government also understands this fact, and they will not interfere with this needy money of the middle class.

Cash Deposit Above 10 Lakh: 

Anything over and above 10 Lakh will catch the eye of the taxman. If your returned income does not match with the amount you deposit, then you might be in trouble. For E.g. suppose, you regularly file the ITR with 5 lakh income. Now suddenly you deposit the sum of 40 Lakh in your account which cannot be justified with a small income. Hence, the department may treat this income as unexplained credits and may tax the income at 30% with 200% penalty under section 270A.

  • Cash credit: Once you deposit the sum into the bank account and under scrutiny proceedings, you were unable to justify the sum, then IT department will deem that deposit as unexplained credit or cash credit under section 68 of Income tax act, 1961.
  • Section 115 BBE: This section is one of the harsh sections of the income tax act. Once it is proved that the cash deposit is cash credit under section 68, and then it shall levy the tax rate of flat 30% without even providing the basic exemption limit. For example  if you have cash credit of Rs.40 lakh, then 12 Lakh will be the tax amount.
  • The penalty under section 270A: Once it is proved that you are a mischief, then penalty provision under income tax act would automatically come into the picture. The AO shall use the section 270A, to levy the penalty of 200%.

However, the penalty of 200% under section 270A can only be levied if any of the conditions is fulfilled:

  • Misrepresentation or suppression of facts.
  • Failure to record investments in the books of account.
  • The claim of expenditure not substantiated by any evidence.
  • Recording of any false entry in the books of account.
  • Failure to record any receipt in books of account having a bearing on total income;
  • Failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply. (ignore, applicable in case of international transaction).

“The most important point of this whole process starts from non-justification. Hence, if you can justify the deposits and has already paid the full taxes, then no penalty can be imposed upon you.

Cash Deposit based on People

Cash Deposit due to Savings of Housewife

Cash can be shown as money saved by the housewife out of the monthly household budget. A homemaker can also show a reasonable amount as her personal pocket money. There is no fixed amount mentioned in the tax laws about how much money can be saved like this, but it has to be a reasonable amount and should be commensurate with the total household income and monthly expenses. If the taxpayer earns Rs 80,000 a month and the household expenses are Rs 40,000, his wife should be able to put away Rs 8,000-10,000 every month.

The tax department may launch a scrutiny if the amount saved exceeds 20-25% of household budget.

Cash Deposit due to Income from Tutions, Classes

Many Homemakers and college students  earn from home tuitions or cookery classes. But this is a common trick that people use to show income for their wife and adult children, even when their wife or children do not take tutions or classes.  An income of up to Rs 2.5 lakh a year can be shown as earned from giving tuitions. But If the income reported is too high, the tax department could scrutinize the returns and ask the assessee to furnish the names of students. In extreme cases, they will also investigate the daily routine of the assessee who claims to be giving tuitions to 20-30 students.

Many Tax professionals are encouraging people to file tax returns of the past two years to make the case even more airtight. Tax laws allow delayed returns to be filed and there is a small 1% penal interest charged for every month of delay in case there is some tax due.
Cash Deposit as Gifts from Relatives Another common trick is to show the cash as gift received from relatives. Gifts from certain specified lineal relatives are not taxable if the recipient is an adult. However, the amount shown as gift should be reasonable and commensurate with the overall economic status of the household.  If the amount exceeds reasonable limits, tax department may ask for names of givers and scrutinise their source of income. For example If the wedding was a lavish affair where a lot of cash was received, the tax department could also ask for the source of the money spent on the wedding .

Pay advances and loans to workers 

Small businessmen, entrepreneurs and even salaried people can utilise cash to pay advance wages to employees and vendors. There is no limit to how much cash can be given out like this but it should be reasonable, lest it creates an inconvenience to the recipient. Once given 2-3 months’ advance payment, employees may be tempted to switch jobs. Instead, it is better to give loans with proper paperwork.
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What do you think of the Demonetization? Will it have any impact? Is the tax and penalty justified?

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