The Income Tax Department is keeping a close eye on some financial transactions, majorly the high-value ones. If your spending patterns don’t match your declared income, you could receive an unwelcome tax notice. Now with advanced data-tracking tools at its disposal, the tax department is on the lookout for unexplained expenses, large cash transactions, and even investments that may seem out-of-sync with your earnings.
In order to not get flagged, it is important to know which transactions can trigger such scrutiny and what you can do to stay compliant.
Transactions That May Trigger a Tax Notice
Here are some of the transactions which can land a tax notice in your mail;
1) Foreign Travel Expenses
If you are planning an overseas holiday, take note. An aggregate expenditure on overseas travel going over Rs 2 lakh within a year may raise taxman’s eyebrows. However, this only happens if your income cannot justify such outlays wherein the officials might ask you to explain the source of the funds. You can always retain the bills of how you funded the trip, either through savings, salary, or other genuine sources.
2) Credit Card Expenses
Even a huge credit card bill can catch the taxman’s eye - but only if the expenses exceed Rs 2 lakh and your income tax return (ITR) cannot reflect the capacity to support such spending. In such cases, a notice may be issued to you however the key here is to make sure your ITR filings align with your lifestyle and spending patterns.
3) Paying Credit Card Bill In Cash Above This Limit
The tax department is often wary of hefty cash transactions. If you are settling credit card dues with more than Rs 1 lakh in cash, it might raise a red flag for tax authorities. They may suspect that the money came from undisclosed sources eventually leading to further investigation. Digital transactions leave an audit trail but such cash payments could invite scrutiny.
4) Investing Over Rs 10 lakh in MFs, Shares, or..
Certain investments in the stock market and mutual funds can also get you in the tax department’s sights. If you are investing more than Rs 10 lakh in financial instruments but not showing enough income to warrant these amounts, it can raise questions from the tax officials. Keeping all the records of your investments and sources of funds will be useful to escape such difficulties.
5) Purchasing Property Over This Amount
Typically, real estate purchases are watched over strictly. When you buy a house worth over Rs 30 lakh, the taxman might check if your reported income is adequate enough to spend such an amount. Any disparity might trigger an inquiry regarding the source of money, so it's best to get your books sorted post such purchases.
6) Depositing More Than Rs 10 lakh in Cash into a Bank Account
Banks are needed to report cash deposits exceeding Rs 10 lakh in a financial year to the I-T department. If your ITR is not sufficient to make such large deposits, you may receive a notice requesting you to disclose the source of this money.
7) Business Cash Transactions
If you are an entrepreneur who makes cash transactions above Rs 50,000, the taxman may get suspicious, because large cash deals with no proper documentation can raise a red alert for possible ‘tax evasion’.
It is good to utilise banking channels and keep clear records of business transactions.
Why Do the Tax Officials Flag Such Transactions?
Says CA Ashish Niraj, Partner at A S N & Company, Chartered Accountants, “These days Income Tax Department is doing 360 Degree profiling to track possible tax evasion.” Most people underreport their income, declaring only bank receipts and spending day-to-day needs using unreported cash.
When the department tracks cash withdrawals and expenditure patterns to identify such mismatches, any irregularity can trigger a notice.
“Purchasing Property, jewellery, Expensive Paintings, Spending Big amounts for lavish weddings etc without corresponding income being offered as income in your Tax returns also leads to Tax officials sending Notices. The department is now equipped with the latest data analyzing tools to catch the tax evaders,” Niraj states.
What to Do If You Get a Tax Notice?
If you get an income tax notice, don't panic but don't ignore it either. You should respond to any such notice immediately with supporting documents. Not reporting can pull penalties and add to your taxable income.
Here's what you should do:
Send a satisfactory and detailed reply: Give records that establish that your transactions are supported by genuine income.
Seek professional advice: Your chartered accountant or tax advisor can assist you in formulating a valid reply.
Do not understate income: Your expenditure pattern should match the declared income.
Prepare for penalty if errors are detected: In case the tax authorities are not convinced by your response, you may be issued a tax notice with penalties between 100 per cent and 300 per cent of the tax payable.
Are there any Legal Risks? Yes, willful tax evasion can lead to imprisonment between six months and seven years, and fines under Section 276C of the Income Tax Act.
Staying compliant and trouble-free requires a few proactive steps from the taxpayers. Here’s what’s needed for the same:
Maintain proper records of all large-value transactions such as income and evidence of expenditures
Remember that your expenditure and investment should be warranted by your reported income
Lastly, when not sure of tax implications, it is always best to take an expert opinion before making big financial decisions.
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