Used UPI or NEFT for a large payment? Here’s what the Income Tax Department may actually look at
Using UPI, NEFT, RTGS or IMPS to transfer money does not, by itself, mean the transaction will trigger an income tax notice. The Income Tax Department’s reporting and compliance systems focus on financial information and potential discrepancies, rather than treating a particular digital payment mode as an automatic trigger for scrutiny.
The key question for taxpayers is whether the money moving through their bank accounts can be explained and reconciled with their income, investments and other financial information reported to the tax department.
What can put a digital transaction on the tax department’s radar?
The Income Tax Department receives financial information from banks, financial institutions and other reporting entities under the Statement of Financial Transactions (SFT) framework. Section 285BA of the Income-tax Act, 1961, read with Rule 114E, requires specified entities to report prescribed financial transactions.
These include specified cash deposits and withdrawals, certain time deposits, credit-card payments, purchase or sale of immovable property, securities and other reportable transactions, depending on the prescribed thresholds and conditions. The information is then available to the tax department for compliance and tax administration purposes.
This means a large NEFT or RTGS transfer is not automatically equivalent to a reportable SFT simply because it is high-value. However, the transaction can still form part of the financial trail that the department may examine when it identifies a mismatch.
For example, suppose a taxpayer reports relatively modest business income but their bank account regularly receives sizeable credits. The department may seek an explanation if those receipts are not adequately accounted for as business receipts, loans, gifts, investment proceeds or another legitimate source.
Similarly, if a taxpayer makes a large investment or property purchase through a bank transfer, the important issue is whether the source of funds can be established. A payment made through UPI, NEFT, RTGS or IMPS does not change the underlying tax treatment of the transaction.
The department can also compare information received from reporting entities with information disclosed in the income tax return. Its Compliance Portal, for instance, provides for e-campaigns relating to significant transactions and high-value transactions.
AIS and Form 26AS can help taxpayers spot mismatches
The Annual Information Statement (AIS) provides taxpayers with a consolidated view of information available with the Income Tax Department. It includes TDS/TCS information, SFT information, tax payments and certain other information received from different sources. Taxpayers can also submit feedback if information displayed in AIS is incorrect.
Form 26AS, meanwhile, has a narrower role. From assessment year 2023-24 onwards, it primarily displays TDS/TCS-related information, while broader transaction-related information is available through AIS.
Before filing an ITR, taxpayers should therefore compare their return with AIS, Form 26AS, bank statements and investment records. Particular attention should be paid to income on which TDS has been reported, capital gains, interest income and transactions reported under SFT.
If a taxpayer receives an income-tax communication, the department’s Compliance Portal can be used to view and respond to active e-campaigns, e-verification requests and e-proceedings.
There is no income-tax penalty or notice merely because a person uses UPI, NEFT, RTGS or IMPS. What can create problems is an unexplained transaction or a mismatch between financial activity and what has been disclosed in the tax return. Maintaining a clear source-of-funds trail and reconciling the ITR with AIS and other financial records can help taxpayers avoid unnecessary complications.
