The government has proposed changes to the income tax act about “unexplained cash deposits” in bank accounts.
Let me interpret:
- You need to be able to explain the source of any cash deposits in your bank account, anytime in this financial year.
- Typically, for small amounts, you can simply say this is money you have saved in the longer term at home, and didn’t deposit in the bank. It is not illegal to hold cash at home. While they haven’t indicated a quantum, it’s quite unlikely they will go after active accounts that deposited upto 2.5 lakh rupees.
- What they will go after is formerly inactive accounts that suddenly saw cash inflows. Or accounts with high inflows.
- Anyhow, if you get a notice and can’t explain the cash, you have to pay 75% of the money as a tax. And if they really don’t like you, 82.5% of the money. One of the two, really.
- If they conduct a raid (called a “survey” or “search”) then you pay either 30% as a penalty (apart from the tax) if you admit to the charges, or a penalty of 60% if you don’t. This needs more clarification but that’s only available on the final passed amendment.
- If you choose to declare this money as undisclosed income anyhow, pay 50% tax, and then put another 25% in a four year interest free deposit into a Prime Minister scheme, and keep the rest.
It’s very complicated. Essentially it means either 50% tax if you just straight up admit all the charges. More if you don’t.
Typically, to be able to say you have not disclosed income, the income tax department will probably have to let you file returns. So action in this case might not come immediately. The tax department will ask, of course, but you have time till 2018 (March) to declare your income in one of the above clauses – or to justify the money as savings.
This is yet another income disclosure scheme. This one might be a way to tax all those deposits in bank accounts that are higher than people can explain. But the IT department is going to have a tough time. It is very difficult to deny claims where people can easily say that they’ve saved this money over many many years – especially because you do not have to declare your “cash balance” every year. And for many people this is simply true. They save in cash over years, and they don’t earn enough to qualify in an income tax bracket, and they have now deposited the Rs. 2 lakh or so into their bank accounts today.
Where some people have deposited more, the department might get aggressive and get tax out. But aggression in tax collection creates more pockets of corruption. While this amendment provides a way out to a few people that are happy to pay about 50% tax, the larger issue will be that the big fish will escape the net.