Want to Avoid Income Tax Notices? Know Bank Transactions That Can Trigger Income Tax Scrutiny
Want to stay away from the eye of the Income Tax Department? In order to avoid unwanted attention from the tax department, you need to understand how your bank transactions are noticed and what limits or patterns in your transactions can lead to an investigation. Below is the comprehensive guide:
- Cash Deposits in Savings Accounts
If the total deposit amount exceeds Rs. 10 lakh in a financial year, combining all your savings accounts, then this is reported to the Income Tax Department via SFT (Statement of Financial Transactions). Even though you divide the amount into minor amounts, if the final total amount exceeds Rs. 10 lakh in the year, it can be noticed.
- Large Cash Withdrawals
If more than 1 crore cash is withdrawn in a financial year (combining all your savings bank accounts). This may attract TDS (Tax Deducted at Source) under Section 194N of the Income Tax Act. TDS will be deducted at a rate of 2% on cash withdrawals in excess of Rs. 1 crore if the person withdrawing the cash has filed an income tax return for any or all three previous AYs. TDS will be deducted at 2% on cash withdrawals of more than Rs. 20 lakh and 5% for withdrawals exceeding Rs. 1 crore if the person withdrawing the cash has not filed ITR for any of the preceding three AYs.
- Fixed Deposits (FDs) and Interest Earnings
It is also reported to the Income Tax Department when you deposit Rs. 10 lakh or more in a fixed deposit (FD). If the deposit in your savings account exceeds Rs. 10,000, the amount becomes taxable. In Fixed Deposit, all interest is fully taxable, under the category “Income from Other Sources” in your ITR. Even though TDS is deducted from Fixed Deposit (FD) interest by banks, you must report this income in your ITR.
- High-Value Transactions
High-value transactions are also reported and monitored by the Income Tax Department. These include credit card payments of Rs. 1 lakh or more paid in cash and Rs. 10 lakh or more paid by any method (like card, bank transfer, etc.) in a financial year. Buying or selling property valued at Rs. 30 lakh or more is also reported. These transactions are cross-checked with your income. If your income doesn’t justify such spending, it can lead to tax scrutiny.
- Multiple Small Deposits
Many times, people think that breaking the amount into different bank accounts and into small deposits can help avoid the Rs. 10 lakh deposit limit and hence can save them from an income tax notice. However, this is not true. This method is called “structuring”, and this activity more attracts the eye of the Income Tax Department. The system is smart enough to identify patterns of frequent small deposits meant to hide larger transactions. Avoid splitting deposits in an attempt to bypass reporting limits.
- Dormant or Inactive Bank Accounts
If you also own a dormant account, a bank account that has not been used for a long time, and then suddenly deposit or withdraw a large sum from it, it may attract the attention of the Income Tax Department. Keep all your accounts updated and linked to PAN, and avoid sudden big movements in inactive accounts.
Golden Rule To Stay Safe From Income Tax Scrutiny
Here are a few golden rules to stay safe from the Income Tax Scrutiny:
- Keep your bank deposits and withdrawals in line with your declared income.
- Try filing your Income Tax Returns (ITR) before the due date. (September 15, 2025, for financial year 2024-25).
- Always disclose all your interest income from savings accounts, fixed deposits, etc.
- Don’t try to hide or manipulate your financial activity, as most high-value transactions are already being reported to the Income Tax Department.
