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Avoid Income Tax Notices for Bank Transactions: Key Rules to Remember

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The Income Tax Department monitors large cash deposits and withdrawals in bank accounts to prevent tax evasion and maintain financial transparency. Failing to comply with the prescribed rules can lead to an income tax notice or even penalties. Here's what you need to know:

1. Deposits Exceeding ₹10 Lakh in a Savings Account

  • Rule: If you deposit more than ₹10 lakh in cash in a financial year, the bank reports it to the Income Tax Department.
  • Action Required: Declare such transactions in your Income Tax Return (ITR) to avoid scrutiny.

2. Cash Deposits Over ₹50 Lakh in Current Accounts

  • Rule: Businesses or entities depositing over ₹50 lakh in cash in a current account are flagged by banks.
  • Recommendation: Maintain proper documentation and link transactions to business activities.

3. TDS on Withdrawals Above ₹1 Crore

  • Rule: For cash withdrawals exceeding ₹1 crore from a bank account in a financial year, Tax Deducted at Source (TDS) is applicable:
    • 2% TDS is deducted if you have filed your ITR.
    • 5% TDS is applicable for those who haven't filed their returns.
  • Tip: Use digital transactions where possible to reduce unnecessary tax deductions.

4. Prohibition on Cash Transactions Above ₹2 Lakh

  • Rule: Cash transactions above ₹2 lakh (for purchases, loans, or payments) are prohibited under Section 269ST of the Income Tax Act.
  • Penalty: Violating this rule can attract a penalty equal to the amount transacted.

5. Transactions Without PAN Above ₹50,000

  • Rule: Providing a PAN number is mandatory for:
    • Depositing cash over ₹50,000.
    • Withdrawing cash over ₹50,000.
  • Risk: Not furnishing a PAN for such transactions can result in a notice.

Tips to Stay Compliant

  1. File Accurate ITR: Always declare high-value transactions in your tax return.
  2. Maintain Records: Keep receipts and documentation for large deposits, withdrawals, or purchases.
  3. Avoid Cash for Large Payments: Prefer digital modes to avoid crossing cash transaction limits.
  4. Link PAN and Aadhaar: Ensure your accounts are linked with PAN and Aadhaar for seamless compliance.

Consequences of Non-Compliance

Failing to adhere to these rules can result in:

  • Tax Notices: From the Income Tax Department.
  • Penalties: Financial fines and increased scrutiny on future transactions.

By staying informed and cautious, you can avoid unnecessary tax issues and ensure smooth financial operations. Would you like assistance in understanding these rules further?