Cash deposits below ₹10 lakh can still attract an Income Tax notice. Here’s why
Many taxpayers believe that cash deposits below ₹10 lakh in a financial year are outside the Income Tax Department’s radar. This assumption stems from Rule 114E of the Income-tax Rules, 1962, which requires banks, co-operative banks and post offices to report cash deposits aggregating to ₹10 lakh or more in savings accounts during a financial year through the Statement of Financial Transactions (SFT).
However, the ₹10 lakh figure is a reporting threshold for specified financial institutions. The Income-tax Act separately empowers the tax department to seek information or examine transactions where necessary under various provisions of the law.
The Income Tax Department also receives financial information from multiple reporting entities. Information relating to taxes deducted or collected, specified financial transactions and other reported details is reflected in a taxpayer’s Annual Information Statement (AIS) and Form 26AS, which are available through the income tax e-filing portal.
The ₹10 lakh reporting limit is not the only trigger
Rule 114E governs the reporting of specified financial transactions by banks and other reporting entities. Besides cash deposits in savings accounts of ₹10 lakh or more in a financial year, the rule also prescribes reporting thresholds for several other transactions, including cash deposits or withdrawals in current accounts, time deposits, high-value credit card payments, purchase or sale of immovable property and investments in specified financial instruments.
Separately, the Income-tax Act empowers the Assessing Officer to call for information or examine a taxpayer’s return where required. Depending on the facts of a case, notices may be issued under provisions such as Sections 142(1), 143(2) or 148, while Section 133(6) enables the department to seek information from taxpayers or other persons.
Therefore, the reporting threshold under Rule 114E should not be interpreted as a limit below which transactions cannot be examined. Whether any transaction is questioned depends on the facts of the case and the powers available under the Income-tax Act.
Keep documents ready to explain the source of funds
If the Income Tax Department seeks clarification regarding a cash deposit, taxpayers should be able to explain the source of the money with documentary evidence. Depending on the nature of the transaction, this may include bank statements, salary records, sale deeds, gift deeds, loan agreements or business receipts.
The Income-tax Act contains provisions to deal with unexplained amounts. Section 68 covers unexplained cash credits, Section 69 relates to unexplained investments and Section 69A deals with unexplained money. Where the explanation offered by the taxpayer is not found satisfactory, such income may be taxed under Section 115BBE, which prescribes a special tax rate for income covered by these provisions.
For taxpayers, the key takeaway is that the ₹10 lakh limit under Rule 114E is a reporting requirement for banks and other specified entities. Maintaining proper records and ensuring that the source of cash deposits can be substantiated, wherever required, can help taxpayers respond to any query raised by the Income Tax Department.
