These Bank Transactions Can Get You an Income Tax Notice
The Income Tax Department keeps an eye on the large-value financial transactions along with the unexplained deposits. These transactions are primarily reported by the financial institutions to the tax authorities through the mandatory filing called the Statement of Financial Transaction (SFT). These are also reflected in your Annual Information Statement (AIS) of Form 26AS. While many of these large-value transactions are normal, some can attract a tax notice. Let us understand the banking transactions that can raise a red flag and get you an income tax notice.
Large Cash Deposit in Single Day
Section 269ST of the Income Tax Act prohibits Taxpayers from receiving or accepting deposits of Rs 2 lakh or more for a single event. Therefore, if you receive Rs 2 lakh or more in cash for goods or property, your bank will alert the income tax department by reporting this transaction through SFT.
Large Value Credit Transactions
If you make large-value or regular credit transactions that are more than the income you have declared in your ITR, the Income Tax department might get suspicious. The banks report credit transactions with the Income Tax Department that are more than Rs 10 lakh annually. For example, if you have reported income of Rs 5 lakh but have spent Rs 10 lakh annually on luxurious purchases using your credit card, you will get a tax notice.
Investments like FD, Shares, Mutual Funds or Bonds
Make sure your investments in Fixed Deposits (FDs), stocks, mutual funds, or bonds align with your declared income. In case it does not match what you have declared, the income tax department will get suspicious. For example, if you have declared an income of Rs 7 lakh in your return, but you have investments of Rs 20 lakh in FDs, the tax department may raise questions about the source of the funds.
Unreported Foreign Income or Assets
If you earn foreign income or have a foreign bank account or investments that are not reported on your return, then it can give you a tax notice. The Common Reporting Standard (CRS) helps the Income Tax Department receive financial information of an Indian resident from other countries. Using this, they detect the undisclosed foreign income and assets.
Large Cash Deposits
If you have deposited large amounts of cash in your bank account, which does not match your declared income, it can attract the attention of the Income Tax Department. The cash deposits of more than Rs 10 lakh in a financial year, as per section 269ST of the Income Tax Act, can be scrutinised by the Income Tax Department. So make sure you follow proper documentation and report the sources of income from which you are depositing the cash.
What Should Taxpayers Do to Avoid a Tax Notice?
To reduce the chances of getting a tax notice, the taxpayers should:
- File ITR Accurately: Make sure you disclose all your income sources, such as capital gains, interest, foreign income or assets, etc.
- Response on Time: If you receive a tax notice, respond on time with the required supporting documents.
- Keep Documents Ready: Make sure you keep your documents organised.
- Seek Professional Help: Consult a tax professional if you are confused by complex transactions.
