Cash and Taxes: 5 Transactions That Might Trigger an Income Tax Inquiry

High-Value Cash Transactions to Be Aware of in India: A Guide to Avoiding Tax Scrutiny

The Income Tax Department in India monitors high-value cash transactions to curb tax evasion and money laundering. While there's nothing inherently wrong with cash transactions, exceeding certain limits can raise red flags and lead to inquiries. Here are 5 such transactions to be aware of:

• Cash Deposits in Bank Accounts: Deposits exceeding ₹10 lakh in a savings account within a financial year might trigger scrutiny. Similar limits apply to fixed deposits (FDs) and recurring deposits (RDs).
• Cash Deposits or Withdrawals from Current Accounts: For current accounts, deposits or withdrawals exceeding ₹50 lakh in a financial year can attract attention from the tax department.
• Purchase of Shares, Mutual Funds, Debentures, or Bonds: Cash transactions exceeding ₹10 lakh for buying shares, mutual funds, debentures, or bonds can be flagged.
• Investment in Foreign Exchange: Buying or selling foreign currency exceeding ₹10 lakh using cash might invite inquiries. This includes traveler's cheques and forex cards purchased with cash.
• Property Transactions: Cash payments exceeding ₹30 lakh for property purchases (residential or commercial) can raise red flags.

Why Do These Transactions Get Attention? Large cash transactions can be used to hide income or launder money. By monitoring these activities, the tax department aims to ensure all taxable income is declared.

What Happens if You Receive a Notice? If the department flags a transaction, you might receive a notice asking to explain the source of the funds. Be prepared to furnish documents like bank statements, sale receipts, or investment proofs to justify the cash transactions.

How to Avoid Scrutiny:

• For large transactions, consider using traceable methods like bank transfers or cheques.
• Maintain proper records of income sources and transaction receipts.
• If you must use cash, keep the amounts below the threshold limits.

Remember:

• This is not an exhaustive list, and the tax department might have additional monitoring criteria.
• Consult a tax advisor for personalized guidance on managing your finances and complying with tax regulations.

By being aware of these high-value cash transaction triggers and following proper financial practices, you can minimize the risk of unwanted tax inquiries.

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