The withdrawal of Rs 2,000 notes has caused confusion among the public regarding its tax implications. While there is a one-time limit of Rs 20,000 and no overall limit on cash deposits in bank accounts, tax experts say depositors should be aware of the Statement of Financial Transaction (SFT) rules.
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Notably, citizens can exchange or deposit Rs 2,000 notes in banks, following Reserve Bank of India's decision to withdraw them from circulation. The central bank has given the public time till September 30 to either deposit such notes in accounts or exchange them at banks.
The income tax rule
According to Gauri Chadha, a tax expert, larger amounts can either be deposited in the savings bank account or it will be frozen in the current bank account.
"If more than 10 lakh rupees are deposited in the savings bank account, then the Income Tax Department can ask questions on this transaction. At the same time, depositing more than Rs 50 lakh cash in the current bank account also leads to reporting in SFT," Chadha told CNBC Aawaz.
This is because high-value cash deposits are reported by banks to the Income Tax Department as per the SFT rules. This is also reflected in the depositor’s 26AS and annual information statement.
In these cases, a tax notice can be received.
Understanding SFT
To keep a watch on high-value transactions undertaken by the taxpayer, the income tax law has framed the concept of statement of financial transaction or reportable account. With the help of the statement the tax authorities collect information on certain prescribed high-value transactions undertaken by a person during the year.
A statement of financial transaction or reportable account has to be filed by certain prescribed entities and in such a statement they are required to furnish the details of specified financial transactions or any reportable account registered/recorded/maintained (discussed later) by them during the year.
Thus, the Income Tax Department keeps track of specified financial transactions carried on by a person during the year on the basis of the information provided by certain prescribed entities in the statement of financial transaction or reportable account.
Taxpayers’ move
On receiving any notice, taxpayers need to explain the nature and source of that amount. If the explanation is unsatisfactory, the said amount may be treated as unexplained income for that previous year and strict action may be taken, experts say.
