Tax And Penalty On Cash Deposit Due To Demonetization

Posted on Posted in Income Tax, Income Tax Return

Tax And Penalty On Cash Deposit Due To Demonetization

Though the latest move of government towards the ban on big notes in the country is aimed at building a black money free society, it has pushed the commons to the edge due to flaws in implementation.  After demonetisation many were looking at the ways to deposit their cash without incurring any tax liability.  If you are looking for the information about tax and penalty on cash deposit based on the amount and type of people depositing it then you can read our article for complete info.

Demonetization and Tax

After demonetization, the tax department has announced that there will be a tax and penalty of 200% on unexplained deposits above Rs. 2.5 lakh during November 10 to December 30 time frame.  People who use benamis to deposit their amounts into banks will be slammed with heavy taxes as per the new Tax Act. People who make deposits of old notes above the limit that they have mentioned to the Income Tax authorities may attract:

  • A minimum of 50% tax may be levied on unexplained bank deposits.
  • The person won’t be able to withdraw the 25% from the original deposit from the bank for four years.
  • Using the taxes that were gained from unexplained money shall be used as funds to build rural infrastructure.
  • Nevertheless, a higher 90% tax and penalty could be imposed if the people do not declare the unaccounted cash voluntarily.
  • The government has also introduced income disclosure scheme called the Pradhan Mantri Garib Kalyan Yojana which allows people to deposit money in their accounts till April 1, 2017 which involves paying 50 percent of the total amount, 30 percent as tax, 10 percent as penalty and 33 percent of the taxed amount i.e., 10 percent will got for the scheme.
  • However, this is not the same of honest tax payers. It is not 45 percent tax and penalty for those who do not maintain any undisclosed amount.
  • There won’t be any tax incurred on those who deposit up to Rs 2.50 lakh in bank accounts as that falls under tax exemption limit, but if it is not the case, they need to go through all the aforementioned tax issues. When it comes to Jan Dhan account, the holder can deposit up to Rs. 50, 000.

income-tax-penalty-on-cash-deposited

Banks Will Report Cash Deposits above the permitted limit to Income Tax Department

The banks were asked to report the cash deposits above the permitted limit to Income Tax department.  The government assured that hard earned money of commons won’t be taken away in the name of taxes and asked them not to worry.  Bank was asked to report total cash deposits between 9 November and 30 December 2016.  These would be maintained in AIR of Form 26AS.

  • Twelve lakh fifty thousand rupees 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

The New Amendments in Income Tax

  • As per the new Amendment in Rule 114B, person has to show PAN in case of depositing money exceeding Rs. 50000 in a single day or more than Rs. 2.5 lakh in the given time frame that ends on 30 December 2016.
  • Amendment in Rule 114E says filing AIR report as required under section 285BA of Income Tax Act, 1961 wrt that involves banks to report deposit of money higher than permitted limit.

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

Form 26AS, also known as Annual Statement, is a consolidated tax statement that has all tax related info associated with a PAN.  AIR depicts how much tax a person has paid to the government and is consolidated from multiple sources like salary/pension/interest income etc.  PART E of Form 26AS contains the details of AIR Transaction.  In case if transactions above the property level then the transactions will be reported to the I-T Department through AIR.

Tax and Penalty on Unaccounted Cash

On declaration of unaccounted wealth by a person, as many will have to come front and pay both tax and penalty.  Under the Income Declaration Scheme that has ended on 30 September 2016 people who have paid only 45% tax will have to answer the questions that will be asked by I-T department and also need to pay extra tax.    The below image depicts the tax and penalty on cash deposited.

Tax on unaccounted cash

If the amount is unaccounted and the sources of income are unaccounted as well, it falls under various provisions of Income-Tax Act, 1961.  The income will be considered to be present year’s income under Section 69A of the Income Tax Act, 1961, and the person needs to pay 30% income tax along with applicable surcharge and education cess, under Section 115BBE of the Act.

Penalty on Unaccounted Cash

Unaccounted income will fall under penalty under Section 270A of the Act that can range from 50 to 200% of evaded tax.  The person who is involved in such a case could also face imprisonment from three months to seven years with fine.  The 50% penalty will be levied in cases of incurred in cases of under-reported income and 200% in case of misreporting income.  Misreporting of income invites a penalty of 200% of the tax payable under the new Section 270 (A) of the Income Tax Act.  People who make deposits Rs. 3 to 5 lakh will not face many problems because the tax and penalty will be within reasonable limits.

People who hide unaccountable amounts will need to face huge penalty.  The tax for someone depositing Rs 20 lakh is 63% and it rises with the increase of amount.  People can also request the I-T department officials to minimize the penalties.

How to deposit cash without incurring a tax liability?

The cash deposited in the bank must match the income declared in the tax return.  If you have the perfect source of your cash, then you can easily deposit your money without any issues.  People were depositing their cash under Jan Dhan account hugely and I-T department is now engaged in collecting data on spurt in deposits in zero-balance Jan Dhan accounts and will slap a 200% penalty on unaccounted cash deposits.

Revenue Secretary Hasmukh Adhia said “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.”

Cash deposit based on amount

Below are the particulars on the type of deposit and the chances of penalty imposed upon them.

Cash deposit up to 2.5 lakh

People who have deposited Rs. 2.5 lakh or below have nothing to worry about.

Cash deposit up to 10 lakh

Most of the people fall in this category.  Though these are not much affected by the rules, they do have to face some minor problems from government.  Many people were dividing the amount into 2.5 lakh and were depositing the money into different accounts of relatives which government understand and so will not interfere.

Cash deposit about 10 lakhs

If the deposited amount is above 10 lakhs, then the I-T department’s eye will be on you.  If you deposit unaccounted cash into your account and fail to explain the source you will have to face lots of problems and also have to pay the tax of 30% along with 200% penalty under section 270A.

Cash credit

Once you have deposited the amount into your bank account and if you fail to explain the source, you will need to answer IT department.  IT department will consider the amount as unexplained credit or cash credit under section 68 of Income Tax act, 1961.

Section 115 BBE

This section is one of the tough sections in income tax act.  If in case it is proved that the cash deposited does not fall under illegal tender, then the person involved in it needs to pay tax rate of flat 30% without even providing the basic exemption limit.

The penalty under section 270A

Under section 270A, once you are proved that you did wrong, then penalty provision under income tax act would come into light automatically.  The penalty would be literally 200%.

Nevertheless, the penalty of 200% under section 270A can only be applied if any of the below conditions are fulfilled:

  • Distortion or hiding of facts.
  • Failure to keep records of the investments on paper.
  • Showing wrong evidence that does not satisfy the claim.
  • Maintaining wrong accounts in books.
  • Failure to record any receipt in books of account having a bearing on total income
  • Ignoring 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).
  • If you have justified amount in your account and have paid all the taxes perfectly then you can avoid penalty.

So, these are the important things that all the people who fall into the category of tax payers need to know.  Make sure to pay your taxes as per the government norms and avoid any further issues with I-T Department.

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