Income Tax Regulations On Cash Deposits And Transactions: All You Need To Know

By setting clear limits and reporting requirements for cash transactions, the government aims to create a more transparent financial system and combat illegal financial activities

For individuals holding savings accounts, any cash deposit that totals Rs 10 lakh or more within a fiscal year must be reported to the tax authorities.

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The Income Tax (I-T) Department has established a comprehensive framework to regulate cash transactions, aiming to curb money laundering, tax evasion, and other illicit financial activities. This article provides a detailed look into the limits and regulations surrounding cash deposits, withdrawals, and other related transactions as per the I-T Act. Adhering to the guidelines is essential for individuals and businesses to avoid penalties and ensure compliance with the I-T laws. By setting clear limits and reporting requirements for cash transactions, the government aims to create a more transparent financial system and combat illegal financial activities.

Cash Deposit Limits in Savings and Current Accounts

Under income tax laws, there are specific thresholds for cash deposits in bank accounts to ensure transparency and accountability. For individuals holding savings accounts, any cash deposit that totals Rs 10 lakh or more within a fiscal year must be reported to the tax authorities. This requirement is designed to monitor significant cash flows and deter potential misuse. The threshold for current accounts is set higher, at Rs 50 lakh in a fiscal year, reflecting the higher volume of transactions typical in business operations.

Although these deposits are not immediately subject to taxation, financial institutions are mandated to report transactions that surpass these limits to the Income Tax Department. This reporting mechanism helps the authorities keep track of substantial cash movements and investigate any suspicious activities.

TDS on Cash Withdrawals: Section 194N

The rules regarding cash withdrawals are stipulated under Section 194N of the I-T Act. According to this section, cash withdrawals exceeding Rs 1 crore in a fiscal year attract a 2 per cent TDS. This measure is intended to discourage large cash transactions and promote digital payments.

For individuals who have not filed their income tax returns for the past three years, the TDS rules are more stringent. A 2 per cent TDS is levied on cash withdrawals exceeding Rs 20 lakh, while a 5 per cent TDS applies to withdrawals over Rs 1 crore in the same fiscal year. It is important to note that the TDS deducted under this section is not considered as income; instead, it can be claimed as a credit when filing income tax returns.

Cash Transaction Limits and Penalties: Section 269ST

Section 269ST of the I-T Act imposes penalties on cash transactions exceeding Rs 2 lakh. This limit applies to single transactions, transactions related to a single event, or transactions within a financial year. However, this penalty does not apply to bank withdrawals, even though TDS provisions may still be relevant for withdrawals exceeding specified limits.

Regulations on Cash Loans: Sections 269SS and 269T

The I-T Act also sets strict guidelines for cash loans. Under Section 269SS, accepting a cash loan exceeding Rs 20,000 is prohibited, while Section 269T restricts repayment of loans above the same amount in cash. Violation of these provisions can result in penalties equivalent to the amount of the loan.

These sections aim to ensure that significant cash movements related to loans are documented and traceable, thus reducing the risk of undisclosed financial dealings.

Compliance for Businesses: Sections 44AD/44ADA

For businesses, it is crucial that cash deposits align with the declared business turnover. Under Sections 44AD and 44ADA of the I-T Act, businesses with a turnover of up to Rs 2 crore and professional firms with gross receipts up to Rs 50 lakh can opt for presumptive taxation. In these cases, cash deposits that match the declared turnover do not attract penalties. However, deposits that appear inconsistent with business operations may prompt scrutiny from the tax authorities.

In instances where the source of income cannot be authenticated, the I-T Department has the authority to issue notices under Section 68 of the I-T Act. Failure to explain the source of such deposits can lead to a hefty tax imposition of 60 per cent, along with a 25 per cent surcharge and a 4 per cent cess.

Additional Restrictions on Cash Transaction

The regulations extend to various other cash transactions to maintain financial discipline and transparency:

Real Estate Transactions: Full cash payments for property purchases are prohibited. All cash payments must be recorded within the prescribed limits in the sale deed to ensure compliance.

Fixed Deposits and Credit Card Bill Payments: Limits are also set for cash transactions related to fixed deposits and credit card bill payments to prevent tax evasion.