Heads Up! Big Cash Deposits Can Trigger Income Tax Scrutiny – Know the Rules

Have you thought about whether depositing a large sum of money into your bank raises flags at the Income Tax Department? The answer in brief is yes. The way taxation works in India, certain cross check or supervision powers are given by the Income Tax Department regarding lapsed or huge cash deposits to ensure that the transaction is legal.  

Unlike in the past where depositing cash didn’t involve much scrutiny, nowadays depositing cash above a certain threshold sets a red flag and can attract an income tax warning explaining the origin of such funds. Such assessments, if advance with no proof or proper explanation, can result in hefty taxation fines.  

Why these measures regarding cash deposit-  

The state placed these limits (rules regarding depositing cash) because of a handful of clear motives:  

To an extent, the state strata wants to legally justify any sudden radical economic changes by economically backing these changes.

What Happens if you Deposit More than 10 Lakh Cash?  

So here is to the sensitive aspect of it:  

Important distinction: One does not solely incur tax purposes on this mount as a result of putting in this quota. But it means the Income Tax will for sure be alerted.

The Income Tax Notice 

Upon receipt of these details from the bank, they may choose to subsequently send you a notice, which seeks further clarification about the origin of such funds. You will have to show evidence that the funds were realized from income, already taxed, savings, gifts permissible by law (within the rule), or other reasonable alternatives.

The 60% Tax Rule (Section 68): When Does it Apply?

Now this is where matters can get serious. Under the Income Tax Act, if asked by the department to explain what the source of money deposited in your account is, and you do not explain to their satisfaction, that amount can be treated as unexplained income under Section 68. In these circumstances, the department can, and very often does, impose tax at very high rates, in these cases, 60% plus other surcharges and penalties will apply (tax rules for cash deposit). This is only for those who do not have any reasonable explanation, they will be forced to face high tax rates as a harsh measure for unexplained cash credits.

What About Large Cash Withdrawals?  

Like everything else, there are rules set for the withdrawl of large sums of money too.  

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