Tax on cash deposit and withdrawal: Understanding the nuances of Tax Deducted at Source (TDS) on cash transactions is an integral part of compliance with Indian Income Tax regulations. These laws encompass cash deposits and withdrawals, identified as specified financial transactions within the tax laws of India. The Indian government introduced these measures as part of their broader strategy to oversee large transactions, stimulate digital payments, and mitigate the prevalence of unaccounted money in the economy. Here’s an overview of the critical aspects of TDS related to cash transactions in India. It is important for a customer to know whether there is any tax liability on the amount deposited in a bank and whether his account will be debited with a TDS amount for withdrawals from his bank account.
Taxability Cash Deposits/Withdrawals – Specified Financial Transactions
According to Income Tax Act, some of the transactions are treated as specified financial transactions i.e. if, during a particular financial year, any person is depositing cash aggregating Rs 10 lakh or more in a saving account then the bank will be required to report such transaction. The limit of Rs. 50 lakh is applicable for current account holders.
It is noteworthy for every individual that though the government is not levying any tax on the deposit of hard-earned money of individuals, if the transaction is done above the specified limit during the financial year then such transaction will be reported by banks as a specified financial transaction to Income Tax authorities.
In case of withdrawal of cash, as per section 194N of Income Tax Act, 1961; TDS will be deducted as:
- 2% in excess of Rs 1 crore in financial year (If ITR has been filed for 3 consecutive years)
- 2% in excess of Rs 20 lakh in the financial year and 5% on the amount withdrawn in excess of Rs 1 crore (In all other cases)
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Taxability in case of failure to establish source
Many times it may happen that person is required to file returns of income but has not filed or the income of such person belongs to a specified exemption limit. In such cases, if the person is depositing cash in a bank account then the income tax authority can issue notice to such person with reference to section 68 of the Income Tax Act. If the person has failed to establish the source of income then such income is taxed at the rate of 60% along with a 25% surcharge and 4% cess.
In case a person is covered under section 44AD/44ADA (Presumptive scheme of taxation for certain assesses for specified business): The assessee is not required to maintain books of account and up to the turnover declared by the assessee in the return of income, the assessee cannot be punished for such deposits. However, the department has the right to question the deposits which has no nexus with business.
For Instance, if a person is receiving notice for cash deposits made by him, where he is engaged in business in which he is receiving huge cash amount on a daily basis. Whether entire amount deposited by such a person will be taxable?
It is a well-established position of law that in such cases if a person proves the genuineness of the transaction then only the profit component of such transaction will be taxable.
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Taxability in case where cash deposited in bank is on account of cash receipts
According to section 269ST of the Income Tax Act, if a person is receiving Rs. 2 lakh in cash during a particular year or in respect of a particular transaction then the person receiving such cash will be penalised as per section 271DA where penalty is equivalent to the amount of cash receipt.
What if the person is receiving money from banks on account of cash withdrawals made by him? Section 269ST specifically excludes such transactions and no penalty will be levied on such transactions. However, if withdrawal is exceeding specified limits then in such case TDS will be deducted from such withdrawals (194N).
Cash receipts may be on account of withdrawals which are previously made by the assessee or on account of exempted income earned by the assessee in such cases if the assessee is receiving notice from income tax then the assessee can present that cash deposited is on account of previous unutilised withdrawals or from exempted income.
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Taxability in case where cash deposit is on account of cash loans
As per sections 269SS and 269T of the Income Tax Act which deals with the acceptance and repayment of cash loans; the assessee is not allowed to accept or repay cash loans which are exceeding Rs 20,000 during a particular year. In case of violation, a penalty is levied as per sections 271D and 271E which is equivalent to the amount of cash loan accept or repaid.
For instance, the assessee is engaged in a business which is an eligible business under section 44AD; during the year assessee has deposited Rs 29 lakh out of which the assessee claims Rs 23 lakh as revenue from business income during the year. Assessee has withdrawn cash of Rs 8 lakh and has accepted Rs 3 lakh from a person in respect of a particular transaction.
As the cash deposit amount is Rs 29 lakh, it can be reported as a specified financial transaction if the person has deposited such an amount in a savings account. As only Rs 23 lakh is claimed as revenue, the assessee can be asked to explain the source of income for the remaining Rs 6 lakh, which can be explained that such has been deposited from an unutilised withdrawal amount.
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Further, the assessee will also be required to note that as turnover is exceeding Rs 20 lakh, GST registration will also be required in case it is not taken revenue amount will be treated as Gross Amount (i.e. inclusive of GST amount). No TDS will be deducted from the amount withdrawn as the withdrawal amount is less than the specified limits of section 194N. As the assessee has violated section 269ST by accepting Rs 3 lakh from a person in respect of a particular transaction, a penalty to that extent can be levied on him.
Before depositing or withdrawing any amount of cash every assessee shall consider the above scenarios which explain when legal action or tax liability is inevitable.
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