Is the IT Department really watching you ???

Is the IT Department really watching you?

In recent times, lot of news coverage is being given to the proceedings by the Income-tax department in respect of their action against tax evaders. Very often we see Newspaper advertisements and TV commercials warning the tax evaders to comply with Income-tax filing and payment requirements. These advertisements/commercials will also have a caption saying “The Income-tax Department is watching” , “The Income-tax Department is having information of transactions” etc…, Given the lower Direct/Indirect collections, the Central Government turns to the Income-tax department with new targets to cover the shortage of its revenue from Direct taxes. Sometimes, due to ignorance of law, many Lower Income / Middle Income group assessees get into trouble by not declaring their correct income and the transactions. It is imperative that the small/medium income group assessees shall be aware of the sources of the information from where the Income-tax department gains access to these data. This will help them in planning their taxes and also to make necessary/correct declarations in their return of income , so that they are out of the mental agony/  pressure of attending the Income-tax office hearings. This article is aimed at providing details of various transactions, which are primarily accessed by Income-tax Department to get hold of the tax evaders.

Transactions watched by Income-tax Department

1)      Cash Deposits in Savings Bank Account

The primary source of information to the Income-tax Department is Savings bank accounts maintained by the account holders in the banks. All the banking companies to which the Banking Regulation Act, 1949 applies are compulsorily required to provide information to the income-tax department in respect of :-

CASH DEPOSITS AGGREGATING TO TEN LAKHS OR MORE IN A YEAR IN ANY SAVINGS ACCOUNT OF A PERSON MAINTAINED IN THAT BANK”

It has to be noted that Deposit of Cash in Savings bank account are only covered under this. Due to the advent of Net Banking/Core Banking facilities , many of the assessees tend to use the savings account to transact for their personal / business purposes.

How to play safe :-

  • Avoid frequent cash deposits into the Savings Bank account.
  • Where it is necessary to deposit cash more frequently, open a Current Account. Many banks offer the facility to open a current account in personal names also.
  • Always use the Cheque/Net Banking facility to transfer funds instead of cash deposits.
  • Never encourage to use your Debit Cards by third parties to with draw cash from your account on account of the payments due to them.
  • When the cash deposit is absolutely unavoidable,
    • ensure that the cash deposits during the year does not exceed 10 Lakhs in a year. (Apr-March)
    • make cash deposit in more than one Savings Bank account so that the threshold limit is split to two accounts and within the limits specified.
  • When the transaction is already done, don’t forget to declare the same in your Income-tax returns to have a minimum damage.

2)      Credit Card Payments

The other primary information is obtained from the Credit Card companies. Due to convenience the plastic money offers, more and more people are turning towards obtaining and using Credit cards to a greater extent. Nowadays , obtaining credit cards has become relatively easy. Same way the usage of the same is also increasing day by day. All the banking companies issuing credit cards are compulsorily required to provide information to the income-tax department in respect of :-

PAYMENTS MADE BY ANY PERSON AGAINST BILLS RAISED IN RESPECT OF A CREDIT CARD ISSUED TO THAT PERSON , AGGREGATING TO TWO LAKH RUPEES OR MORE IN THE YEAR

 How to play safe :-

  • Limit your transactions in the Credit card to less than Rs. 2 Lakhs in a year.
  • Where it is unavoidable, obtain additional card and try to split the transactions to more than one credit card from a different credit card company.
  • Never make any purchases for others using your card , as this is likely to get recorded in the books as your transaction.
  • When the transaction is already done, don’t forget to declare the same in your Income-tax returns to have a minimum damage.

3)      Purchase of Units in Mutual funds

Many assessees , particularly persons who are not interested in trading in securities on their own, prefer to invest in Mutual funds. This offers them the comfort of utlising the expertise of the Fund Managers and good returns at the same time. This is evident from the growth of the mutual fund sector in the last decade. This also serves as a source of information for the Income-tax department. A trustee of a mutual fund or such other person managing the affairs of the Mutual fund  is required to provide information to the income-tax department in respect of :-

RECEIPT FROM ANY PERSON OF AN AMOUNT OF TWO LAKH RUPEES OR MORE FOR ACQUIRING UNITS OF THAT FUND.”

How to play safe :-

  • Split the investments between your family members so that the overall limit is not exceeded.
  • Plan your investments in more than one scheme of the mutual fund schemes to escape from this limitation.
  • When investments are made during year end, split the investment between March & April so that you can take both the benefits of investment more than 2 lakhs and investment in the same name.
  • When the transaction is already done, don’t forget to declare the same in your Income-tax returns to have a minimum damage.

4)      Purchase of Bonds/Debentures issued by Companies

Due to the raise in the rate of interests and availability of large amount of funds, more and more companies are turning towards issue of Bonds/Debentures for mobilizing funds for their businesses. This is also evident from the increase in number of bond/debenture issues by many companies inIndiatoday. This is another source of information for the Income-tax department for gathering information regarding investments by assesses/ non-assessees. A Company (or) an institution issuing bonds or debentures is required to provide information to the income-tax department in respect of :-

RECEIPT FROM ANY PERSON OF AN AMOUNT OF FIVE LAKH RUPEES OR MORE FOR ACQUIRING BONDS OR DEBENTURES ISSUED BY THE COMPANY OR INSTITUTION.”

How to play safe :-

  • Split the investments between your family members so that the overall limit is not exceeded.
  • Plan your investments in more than one scheme of the Bond/Debenture schemes to escape from this limitation.
  • When the transaction is already done, don’t forget to declare the same in your Income-tax returns to have a minimum damage.

5)      Purchase of shares in Public/Rights Issue

Many investors turn to the equity markets for their investments in order to diversify their investments and also to gain more from the equity markets. This has resulted in more and more companies coming out with Public/Rights issue of their shares. This serves as another source of information for the Income-tax department. Every company issuing shares through a public or rights issue shall provide provide information to the income-tax department in respect of :-

RECEIPT FROM ANY PERSON OF AN AMOUNT OF ONE LAKH RUPEES OR MORE FOR ACQUIRING SHARES ISSUED BY THE COMPANY.”

How to play safe :-

  • Split the investments between your family members so that the overall limit is not exceeded.
  • Plan your investments in more than one scheme of the Bond/Debenture schemes to escape from this limitation.
  • Please note that in case of investments through ASBA mode , where the amount was actually blocked and post allotment , shares are allotted, it will be considered as receipt for the shares even though the allotted shares are of less than Rs. 1 Lakh value. Hence it is important to note that application for shares through ASBA mode shall also be for less than Rs. 1 Lakh.
  • Another point to be noted is that allotment of shares to the extent of 1 lakh is not necessary to get covered under this provision. Even an application for shares for Rs. 1 Lakh or more will cover this provision.
  •  When the transaction is already done, don’t forget to declare the same in your Income-tax returns to have a minimum damage.

6)      Purchase or Sale of Immovable Property

Real estate Investments are considered as one of the best investment avenue to tame the effect of inflation. The return on investment in the real estate investments have also proved this. This sector offers vide range of investment opportunities for investors. The main and lucrative source of information is obtained from this sector by the Income-tax department. The source for this information is none other than the Government department itself. Every Registrar or Sub-registrar appointed under Section 6 of the Registration Act , 1908 shall provide information to the Income-tax department in respect of :-

PURCHASE OR SALE BY ANY PERSON OF IMMOVABLE PROPERTY VALUED AT THIRTY LAKH RUPEES OR MORE.”

How to play Safe :-

  • Always register properties with the value not less than the Guideline value as notified to avoid disputes at later stage.
  • Never enter into undisclosed Real estate transactions which may result in trouble.
  • Ensure that the transactions entered by you in real estate are declared in your books of accounts with proper sourcing for funding these transactions.
  • Never transact real estate transactions through power of attorney. Remember that ,as per records, the Power of attorney holder is transacting on your behalf and the money received / paid by him is considered as your transaction. In such a case, declare the transaction in your books of accounts.
  • Maintain complete records in respect of all real estate transactions. (Copies of Purchase Deeds, Sale Deeds , Construction agreements, Power of Attorneys, etc..,)
  • Pay the relevant Capital Gains tax if applicable. Avoidance of this is a temporary relief. But the penalty levied for non-disclosure is more than the Capital gains.
  • Try to plan your Capital Gains Tax. But do not try to evade the tax. There are many ways you can avoid capital gains tax. Use them wisely.
  • Also note that purchase of agricultural land, industrial land, plots, flats, Residential properties and all other types of real estate transactions are covered under this provision.

7)      Purchase of Bonds issued by RBI

Another source of information for the Income-tax department is the Bond market. Reserve Bank ofIndiaissues many bonds from time to time. Every officer of the Reserve Bank ofIndia, who is authorized by the RBI shall provide information to the Income-tax Department in respect of :-

“RECEIPT FROM ANY PERSON OF AN AMOUNT OR AMOUNTS AGGREGATING TO FIVE LAKH RUPEES OR MORE IN A YEAR FOR BONDS ISSUED BY THE RESERVE BANK OF INDIA.”

How to play safe :-

  • Split the investments between your family members so that the overall limit is not exceeded.
  • Plan your investments in more than one scheme of the Bond schemes to escape from this limitation.
  • When investments are made during year end, split the investment between March & April so that you can take both the benefits of investment more than 5 lakhs and investment in the same name.
  • When the transaction is already done, don’t forget to declare the same in your Income-tax returns to have a minimum damage.

8)      Other Sources of Information

Apart from the above, the following are the other sources from which the Income-tax Department is tracing high value transactions :-

a)      Street Surveys by the Income-tax Department

b)      Form 15G/15H submitted to banks/financial Institutions for Non Deduction of tax at source.

c)      Payment of huge capitation fees to Educational institutions for securing a seat for Higher Professional Education.

d)     Huge TDS in a particular name not corresponding to the declared income.

e)      Purchase of Jewellery in Cash for higher values.

f)       Receiving data from builders, Investment consultants & others regarding high value transactions.

g)      Frequent Purchase of Demand Drafts for higher values.

Conclusion :-

Due to the vide source of information available to the Income-tax Department, it is very much true that the Income-tax Department is watching all the high value transactions. Hence it is better to be aware of these transactions and plan your tax filings accordingly. A proper planning along with suitable declarations will make you feel safe and  make you avoid sleepless nights.

 

28 thoughts on “Is the IT Department really watching you ???”

  1. Thanks for the informative article.

    I wanted one clarification in the case of MF investment – is the limit of Rs 2 lacs for each instance or in the aggregate for the entire financial year?

  2. Dear Mr. Venkatesh,

    The rule reads as under :-
    “RECEIPT FROM ANY PERSON OF AN AMOUNT OF TWO LAKH RUPEES OR MORE FOR ACQUIRING UNITS OF THAT FUND.”

    Hence , in my opinion, this limit is for purchase of units from same MF company for the year. This will apply even if the payments are made in more than one instance.
    Hope this clarifies your query.

  3. I have done cash transactions in my saving bank account which are around 28 Lakhs. I was not knowing about the limit of 10 lakh. I have not shown that while filing return also. Now i have received the notice regarding the same. What could be the penalty for this or how i can get out of this..

  4. Dear Mr. Saleem,

    This depends on the nature of transactions carried on by you. If it is a genuine business/other transaction, which you can declare in the books of accounts maintained and if you can satisfy the ITO that the transaction is declared / covered in the return of income filed by you, the ITO will allow your transactions and the claim.

  5. Hello sir,
    Thanks for your article.
    I have similar type of query.

    I will be getting a cheque of around 20 Lacs in April 2013 as return of my previous investments. I have savings account as well as current account (Salary account of HDFC).
    -Will it acquire any Tax?
    -Will it be questioned by the bank?
    -Will there be any other problem???

    Please help and guide. How can i play safe?
    Thanks in advance.

    Sandeep

  6. Dear Sandeep,

    With regard to taxation, the following are the points to be noted :-

    1) If return is a Dividend on equity shares on which dividend tax is paid, it will be completely exempt.
    2) If the return is on account of sale proceeds of listed equity shares held for more than 1 year, the entire amount of capital gains is exempt.

    Since you have not specified the nature of return, i presume the same as above.

    With regard to questioning by bank, in my opinion & experience, the banker will not question on the cheque deposit as it is their business to collect the cheques for their customers.

    My suggestion for playing safe is to declare the transaction in your tax returns while filing your tax returns.

    Thanks.
    -Sridhar

  7. Hello sir,
    Thanks for reply.
    Actually i was worried about the fact that one cannot deposit more than 10 lakhs in savings account also it will be questioned by bank as well as RBI.
    But since i am getting cheque of my investment return, hope it will not cause any problem/concern. Am i correct?
    I have not declared this amount while filling my tax returns as i was not aware about the date/month i wil get the same.
    Will it cause any problem?

    Thanks again.

    Sandeep

  8. Hello Sir,

    I would like to know about the limits on foreign transactions (from US). How closely does IT dept. watch foreign transactions? I\’m referring to income by doing freelance IT projects online. The payment could either be directly remitted to bank account (via remittance service of various banks) or via PayPal (only in few cases).

    What kind of limit on number of transactions, maximum amount per transaction, maximum amount in a month/year is there to trigger the IT watch list?

    Plus, any tax benefit by working under a sole proprietorship company/firm instead of just getting foreign income as an individual (like I\’m getting right now)?

    Would it be advisable to remit the amount to more than one bank account, instead of doing NEFT to 2nd account after remittance?

    Thanks,
    Harman.

  9. Kindly help with my queries,
    I am going to sell a flat for a profit of 9.7 lacs. I had purchased that 4 years back.

    My query is, if i deposit the cheque received from purchaser directly into savings bank a/c, whether bank will deduct the tax amount? If yes, then next question is how bank will know about the details of sale deed (i.e. profit earned, year i purchased etc.). Do i need to produce sale deed while depositing the cheque?

    Also, instead of depositing the cheque into savings a/c, if i deposit it into my loan a/c(for prepayment of loan of other property), will my lender bank will deduct tax amount while depositing it?

  10. Dear Mr. Imran Khan,

    The deposit of the sale proceeeds either to your savings or loan account will not entitle the bank to deduct tax on the same.

    You need to declare the income by your self while filing your income-tax returns and pay the necessary tax for the same. Also try to pay the tax in Advance during the financial year itself to avoid payment of interest on tax.

  11. I have purchased the land for Rs. 3 lac in 2010 & Now want to sell it for Rs. 35 lac.
    What will be the tax amount & how I can reduce this tax amount?

  12. Sir,
    I have a question regarding credit card payments of a limit of 2 laksh or more. For example if my salary per annum is around 7 lakhs and If I use card for around 2.5 lakhs do I need to show anything on the ITR. Can you brief on this please?

  13. Dear Mr. Sharan,

    If such payment is made from a single credit card, you need to disclose the same in your income-tax returns. The amount spent should be declared in the return of income.

  14. Sir,
    But that amount is the amount from my savings account which is my salary account which is TDS one. I can spend that amount in any way. So If i disclose the amount in filing do I nedd to pay any extra tax for that spends.

  15. Sharan,

    The intention behind this Income-tax provision is to ensure that the amount is spent from the Sources of Income on which taxes are paid. In your case, if you are able to clearly establish that the amount spent is out of your taxed income (Salary in your case), there is no requirement of paying the tax.

    Moreover, in your return of income you are just confirming the same by disclosing the same. You need not pay any tax on the same while declaring the same in the return of income. It is just a disclosure requirement.

  16. Dear Mr. Mahadev,

    This depends upon many factors based on which taxability will be decided. You need to contact tax professionals with complete details for clear position on taxability.

    On a nutshell, the following are the factors to be considered :-

    1) Any capital assets held more than 3 years will be considered as Long term capital asset and the Capital Gain on the same will be liable for Long Term Capital Gains Tax. In other cases, it will be considered as Short Term capital Gain

    2) Long Term Capital Gain will be charges @ 20% whereas short term capital gains will be taxed as per your Income slab applicable.

    3) With regard to saving tax on Long term capital gains, the following are the options available for claiming exemption from Long Term Capital Gain Tax :-
    – Investment in House Property
    – Investment in Capital Gain Bonds (REC,NABARD , etc..,)
    – Investment in Capital Gain Accounts Scheme in authorised banks for future investments in House Property.

    For detailed, clear position in your case, i suggest you contact a Tax Professional in your city with complete details of the transaction.

  17. Sir, is there any exemption in capital gains tax if i use gains from selling one property to pay back my housing loan of other property?

  18. Sir, Capital Gains on sale of a flat are calculated using Inflation Indexed Purchase Cost or Current Govt. Valuation?
    I purchased the flat in 2008-09 for 3lacs and sold in 2012-13 for 15.25lacs
    So using CII, my purchase value is 4.39lacs and hence Capital Gains Tax = 2.17 lacs

    But at the same time, the current value of the flat given by Govt. valuation officer is 7 lacs.
    So, with this valuation my profit will be = 15.25-7 = 8.25lacs and Capital Gains Tax = 1.65lacs

    Which one is to be followed. Please advise

  19. Dear Mr. Imran Khan,

    The Capital Gains as per Income-tax Act shall be calculated using the Cost Inflation Index peridically notified by the Income-tax department.

    The Sale value of the flat shall be the maximum of

    1) Sale consideration as per the Sale Deed
    2) Value Adopted for Stamp duty purposes

  20. NAGARAJA SHARMA

    Dear sir,
    My Name is nagaraj sharma, doing as a wedding planner, i am going recieve an amount of 3 million us dollars for a wedding function to be performed in India, now the party is going to transer the 3 Million US Dollars to my savings account. my questions are.
    1) How can I disclose this huge transaction for IT purpose.
    2) How the Bank is going to pay the amount in Rupies
    3)what are the rules for this transaction to be followed
    plz help me before giving my account number to the party

    thanks and regards
    NAGARAJ SHARMA

  21. Dear Mr. Nagaraj Sharma

    These days there are lot of online/email/mobile scams claiming to send gifts from abroad. Hope you are taking necessary care about the genuineness of the transaction.

    With regard to taxability, any gift received from Non-relatives will be taxable in receipient’s hands as Income.

    If the same is through proper banking channel, the bank shall credit your account in INR.

    Again, do not be a victim of lottery/gift online scams.

    Please check this link from RBI before proceeding. http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=21110

  22. Dear sir,

    Clarification regarding Mutual Fund AIR.

    The words ‘Same Fund’, do they mean a) same fund scheme or b) same fund house?

    For example, does the following qualify for AIR?

    1. 1.5 Lakh in HDFC equity fund, in FY 2013-14.
    2. 1.5 lakh in HDFC liquid fund, in FY 2013-14.

  23. Hi,

    I just want to clarify, I have two credit cards (from two different banks) and till date I’ve spent a total of 2.15 lakhs on both the credit Cards (1.5 Lakhs on 1st Credit Cards and 65 Thousand on the other Credit Card).

    So basically, I have not yet spent more than 2 Lakhs on a single credit card and will not spend more than this in this fiscal year.

    Will I need to specify anything in the ITR ?

    Pl

  24. Cash Deposits in Savings Bank Account

    Hi,
    Your suggestions are very confusing.
    Your first point:
    1. Cash Deposits in Savings Bank Account:
    •Always use the Cheque/Net Banking facility to transfer funds instead of cash deposits.

    — First of all, if I use Net banking facility, RBI gets the updates. So, very easy to track your funds.
    ???

  25. Yes. The purpose of this restriction is to curtail money laundering.

    When you are confident about the genuinity of the transaction and if you can provide necessary details for the same, you dont have to worry as to who is tracking your transaction.

    Kindly clarify the confusion you have to enable us to clarify the same.

  26. So I have a hotel and my savings account gets money from makemytrip, yatra and other online booking agents via NEFT.

    So do I need to worry because these NEFT transaction crosses 10 lacs easily. Should I open a new current account for this? Please explain.

  27. Since it is NEFT Transaction you dont have to worry. However, you need to declare the income so earned in your IT Returns. Opening of Current Account is most appropriate in my opinion.

  28. Sir,
    Iam planning to buy a new home for 40 lakhs,
    So I sold my current home for 34 lakhs. I had purchased it 24 years back for 3 lakhs.

    At the time of agrement i got 9.5laks rupees cheque as an advance and I deposited it in to my sb account.
    After one month I will get 24 lakh cheque.
    If i deposit that 24 lakh cheque in my sb account ,do i need to pay income tax for this?

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