Tax on cash deposit and withdrawal: What you need to know in 2023

Tax on cash deposit and withdrawal: What you need to know in 2023

The Reserve Bank of India (RBI) recently announced the withdrawal of Rs 2,000 denomination banknotes from circulation. Although these notes continue to hold their legal tender status, there is a deadline for exchanging them, which is set for September 30th. Considering the large number of individuals likely to visit banks for the purpose of exchanging Rs 2,000 notes, it is worth exploring various methods for exchanging them. One such method involves depositing the notes into a bank account and subsequently withdrawing the funds. In this scenario, customers may be concerned about potential tax liabilities on the deposited amount and the possibility of their account being debited with a Tax Deducted at Source (TDS) amount upon withdrawal.

 

It is important for customers to understand the implications of these actions in terms of taxation. Depositing money into a bank account, including the exchange of Rs 2,000 notes, does not typically attract any immediate tax liability. Banks generally do not levy taxes on deposited amounts. However, it is important to note that any interest earned on the deposited funds in the bank account may be subject to taxation. Interest income earned on savings accounts is eligible for a deduction of up to Rs 10,000 under Section 80TTA of the Income Tax Act. If the interest income exceeds this threshold, it will be taxable as per the individual’s applicable income tax slab.

Regarding TDS on withdrawals, it is essential to clarify that as of now, there is no TDS imposed on cash withdrawals from a bank account. However, the government has implemented certain measures to monitor and track large cash transactions. Cash withdrawals exceeding a specified limit within a particular financial year may require individuals to provide additional documentation or explanations for the transaction. These measures aim to curb black money and promote digital transactions.

It is crucial to keep in mind that tax laws and regulations are subject to change. It is advisable for customers to consult with qualified tax professionals or financial advisors to obtain personalized advice based on their specific circumstances and the most up-to-date tax provisions.

Furthermore, individuals should maintain proper records of their transactions, retain supporting documents, and comply with any reporting requirements stipulated by the applicable tax laws and regulations. This proactive approach will facilitate accurate tax filings and minimize potential tax-related issues in the future.

Under the provisions of the Income Tax Act, certain transactions are classified as specified financial transactions. One such transaction pertains to cash deposits in bank accounts. If an individual deposits cash amounting to Rs 10 lakh or more in a savings account during a specific financial year, the bank is required to report this transaction to the relevant authorities. For current account holders, the reporting threshold is set at Rs 50 lakh.

This reporting requirement is in place to enhance transparency and facilitate the monitoring of high-value cash transactions. By mandating the reporting of such transactions, the authorities aim to prevent tax evasion, money laundering, and other illicit activities.

It’s important for individuals to be aware of these provisions and ensure compliance with the reporting requirements. By doing so, they can maintain transparency and align with the regulations set forth by the Income Tax Act.

It’s worth noting that these reporting thresholds apply specifically to cash deposits in bank accounts. Other financial transactions, such as electronic fund transfers, may also be subject to reporting requirements, depending on their nature and value.

In situations where a person is required to file income tax returns but has not done so, or where the income of such person falls within a specified exemption limit, and they make cash deposits in a bank account, the income tax authority can issue a notice to that person under Section 68 of the Income Tax Act.

Under this provision, if the person fails to establish the source of income for the cash deposits, the income tax authorities have the authority to tax such income. In such cases, the income is taxed at a rate of 60% along with a surcharge of 25% and an additional 4% cess.

It’s important for individuals to comply with the income tax regulations and file their returns if required, even if their income falls within the exemption limit. Failing to do so may result in the authorities scrutinizing cash deposits and questioning the source of the funds.

Under Section 269ST of the Income Tax Act, if a person receives a sum of Rs. 2 lakh or more in cash in a particular year or in relation to a specific transaction, it is considered a violation of the provisions. The person receiving such cash will be subject to penalties under Section 271DA of the Income Tax Act.

As per Section 271DA, the penalty for receiving cash in excess of Rs. 2 lakh is equivalent to the amount of cash received. This means that the penalty will be imposed at 100% of the cash receipt amount.

Under Sections 269SS and 269T of the Income Tax Act, specific provisions govern the acceptance and repayment of cash loans. According to these sections, an assessee is not permitted to accept or repay cash loans that exceed Rs. 20,000 in a particular year.

In case of a violation of these provisions, penalties are imposed under Sections 271D and 271E of the Income Tax Act.

• Section 271D: If an assessee accepts a cash loan in contravention of the prescribed limits, a penalty is levied. The penalty amount is equivalent to the amount of the cash loan accepted.
• Section 271E: Similarly, if an assessee repays a cash loan in violation of the prescribed limits, a penalty is imposed. The penalty amount is equivalent to the amount of the cash loan repaid.

These penalties are in place to discourage cash transactions and promote transparency in financial dealings. The aim is to ensure that loans are properly documented and the use of unaccounted cash is discouraged.