Income tax department uses various methods to cross check data filed by you in your income tax return with bank statements, property records, investment, credit card spending, buying cars and travel details.
All high value transactions in India are reported to income tax authorities.
Entities like banks, financial institutions, and certain other specified businesses are obligated to report these high value transactions to ensure transparency and compliance with tax laws.
Understanding these limits imposed by the tax authorities is crucial to avoid unexpected legal complications.
In this article, we will discuss how cash transactions are regulated under income tax laws in India. Knowing these provisions will help you correctly file your return.
Cash deposit limit in savings and current accounts
As per tax laws, banks are required to report cash deposits in a savings account exceeding 10 lakh rupees in a financial year ( April 1st to March 31). This limit also applies to fixed deposits.
For current accounts, this threshold limit is 50 lakhs rupees per financial year.
If a taxpayer’s aggregate cash deposits in savings and/or current accounts surpass this threshold, the information is reported to the Income Tax Department.
When such reported cash deposits are not aligned with your declared income, taxpayers may attract scrutiny from tax authorities. Make sure the accounts and records are maintained to explain such high value deposits.
This provision is also applicable to co-operative banks.
Tax deducted on Cash withdrawals – Section 194N
In order to curb cash transactions and encourage digital payments, the government has introduced section 194N to the Income tax act, 1961.
According to the provisions of section 194N, a bank or post office is required to deduct tax (TDS) at the rate of 2% when an individual or HUF withdraws cash exceeding 1 Crore rupees in a financial year.
Section 194N is applicable to withdrawal from savings, current and any other accounts with a bank or post office.
However, section 194N is not applicable to government entities and certain other specified persons.
The deductor, in this case the bank and post office, must report tax deducted along with other details in the relevant TDS return to the government.
The deductee can claim tax credit for this deduction of tax (TDS) while filing their income tax return.
If an individual has not filed an income tax return for the last three years, then 2% TDS applies to cash withdrawal exceeding 20 lakhs rupees in a financial year.
2% TDS will be increased to 5%, in cases where the amount withdrawn is above 1 crore in a financial year and the account holder has not filed income tax return for the last three years.
Cash transaction limits and penalties – Section 269ST
Section 269ST specifically prohibits any person from receiving an amount of 2 lakh rupees or more in cash in a single day for the sale of goods or services.
This provision is applicable to all individuals and entities, including businesses, professionals and other organizations irrespective of their nature or size
If anyone violates section 269ST, the penalty is equal to the amount received in cash that exceeds the prescribed limit of 2 lakh rupees.
Section 269ST is not applicable when payment is received by the government or local authorities.
In order to avoid penalties of section 269ST, you need to make sure that the payment is received through a banking channel.
Cash loans – Section 269SS and 269T
Section 269SS prohibits accepting loans or deposits in cash exceeding 20,000 rupees.
If the loan or deposits exceed 20,000 rupees, it should be conducted through a banking channel.
Section 269T deals with repayment of loans or deposits.
Section 269T prohibits repayment of loans or deposits in cash exceeding 20,000 rupees.
Any repayment must be made through banking channels.
Following table summarizes how cash transactions are regulated under income tax in India:
| Section 269SS | Prohibits accepting loans or deposits in cash exceeding 20,000 rupees. |
| Section 269ST | Prohibits receiving cash payments of 2 lakh rupees or more for goods or services. |
| Section 269T | Prohibits repayment of loans or deposits in cash exceeding 20,000 rupees. |
| Section 194N | Tax to be deducted @ 2% when withdrawal exceeds 1 Crore rupees for a financial year. |
| Section 285BA read with Rule 114E | Cash deposit in savings accounts exceeding 10 lakh rupees per year is reported to the tax department. For current accounts this limit is 50 lakhs rupees per year. |
In addition to the above regulations, you may get tax notices for high value transactions related to credit card expenses, buying property and investing in mutual funds and shares.
If Your credit card payments exceed 10 lakhs in a year, it gets reported to tax authorities. Both banks and cooperative banks report these transactions. Cash remittance to abroad and buying forex also gets reported to tax authorities.
Registers or sub-registry office of property, reports purchase, sale or transfers of property worth 30 lakhs or more to tax authorities.
Therefore, you should make sure that all the income and high value transactions are matching with the income that you are showing in your income tax return.
In order to manage scrutiny, you need to maintain records of all financial transactions. Consult a tax practitioner for guidance on tax implication and compliance.
