Financial transactions within family: Maintain record to avoid IT notice

Banks are required to report cash deposits exceeding ~10 lakh in savings accounts or ~50 lakh in current accounts, which may trigger scrutiny

It is common for relatives to exchange cash, but overlooking the tax implications could invite scrutiny from the Income Tax department.

 

“The Income Tax Department closely monitors large cash transactions to prevent tax evasion. While gifts between specified relatives, such as husband and wife or father and son, are exempt from tax under Section 56(2) of the Income Tax Act, they must still comply with cash transaction rules. Section 269ST, introduced in the Finance Act of 2017, prohibits a person from receiving Rs 2 lakh or more in cash from a single source in a day, in a single transaction, or in relation to one event. Violating this rule attracts a penalty equal to the amount received under Section 271DA. Additionally, if a gifted amount generates income (such as interest or rent), it may be clubbed with the donor’s taxable income as per Section 64,” said Amit Bansal, Partner, Singhania & Co.

 

“If any cash transaction occurs beyond Rs 2 lakhs or more in a single day or in a single transaction or in respect of one event or occasion from a person, then there could be a penalty of a sum equal to the amount received on the person receiving such amount. There would not be any penalty if the person receiving such an amount is able to prove that there were good and sufficient reasons for the cash dealings exceeding the cash transaction threshold amount. In any case, such cash transactions may face scrutiny by the tax authorities. Therefore, it is advisable to undertake transactions through banking and online banking modes and maintain documentation such as gift deeds as far as possible,” SR Patnaik, Partner (head - taxation), Cyril Amarchand Mangaldas.  Calculate Income Tax: Income Tax Calculator Tool

 

The Income Tax Department can issue a notice if it detects high-value cash transactions that violate tax laws. Banks are required to report cash deposits exceeding Rs 10 lakh in savings accounts or Rs 50 lakh in current accounts, which may trigger scrutiny. Notices can also be issued if there are frequent high-value cash transactions, unexplained cash receipts under Section 69A, or discrepancies between declared income and actual transactions.

 

How to avoid tax scrutiny and penalties?

 

To avoid tax scrutiny and penalties, it is advisable to conduct large transactions through banking channels like NEFT, RTGS, UPI, or account payee cheques.

 

Keeping proper records of cash transactions and ensuring compliance with Section 269ST can help in case of inquiries.

 

Individuals should also be prepared to justify the source of any large cash deposits to avoid unnecessary legal complications.

 

By following these best practices, one can remain compliant with income tax laws and minimise the risk of receiving a notice.