Giving or Receiving Cash and Bank Account Deposits Can Attract Gift Tax
When we are in urgent need of money, we often take some loan from our relatives or friends with a promise to repay it back within a few days or month right? We do it pretty often and almost every time we do it, we receive the money in cash. Similarly, we may lend someone some money upon request and we mostly pay in cash. This is a common practice all over the world and not just in India. However, did you know that paying or receiving cash over 20,000 can attract attention of Income Tax Department? Especially, if that cash money is directly deposited at someone’s savings bank account, it can cause trouble for the person in whose savings bank account it is being deposited! Banks will immediately report such cash deposits to Income Tax Department and gift taxes will be applied.
Giving or Receiving Cash in Excess of INR 20,000
Often, we come across situations where instant cash is required. This can be for any reason such as a medical emergency. In situations like those, we go to our friends or relatives, take the cash and promise to repay after a few days. There are two or three reasons we do so:
- Taking cash from friends or relatives do not attract interest rates as they are not formal loans.
- There is no paperwork or documentation involved in the cash transaction.
- We have the freedom of delaying a few days while repaying the money.
However, this is no longer an option for us if we are seeking immediate cash loan from our friends and family in excess of INR 20,000. Since June 1, 2015, a new rule was enforced by the government. Referred to as Section 269SS in the Income Tax Act, the new rules states that giving or taking a loan of more than INR 20,000 to or from another person in cash or direct deposit is prohibited. For any such transaction, using bank draft or check is mandatory.
Similarly, there is another section which is known as Section 269T, which prohibits a person from repaying such loan in cash if the loan amount is higher than INR 20,000. The repayment should be repaid either using a bank draft or a check.
Initially, this rule was applicable only and only for commercial loans. However, now this rule has been extended to individuals as well. If any such instance is found, the IT assessment officer will have the freedom to levy a penalty. The amount of penalty can be as high as the amount of loan given or repaid.
The reason this thing was enforced was to ensure that the source of the cash can be traced and tax evasion can be stopped so that the economy can benefit.
What Does Section 269SS Say?
This section simply prohibits someone from taking or receiving a cash loan above INR 20,000. The head for this section as mentioned in the Income Tax Act reads as ‘Mode of accepting or takingcertain types of deposits, loans or a specified sum of money’. The section prohibits any person from taking or accepting money from anyone else (this ‘anyone else’ is hereby known as the depositor), in any other form other than bank draft or cheque which has to be account payee. Alternately, the money should be transferred by the depositor to the receiver or recipient through electronic clearance system of banks.
Section 269SS has three different clauses, any one of which when satisfied will attract penalty. These three clauses and their relevant examples are cited in the table below. A word of warning – these clauses are a bit confusing and hence, read again and again in case you are having difficulty understanding the clauses. We will however try to put these clauses in layman terms so that you can understand them easily.
|(a) This clause states that if the amount of loan or deposit or the specified some of money (or the aggregate) exceeds INR 20,000 and has not been paid using allowed methods, the section rule will become applicable.||Let X be depositor and let Y be receiver. X gives a cash loan of INR 10000 to Y in 2015 and then again, X gives another cash loan of INR 10000 to Y in 2016. In this case the aggregate is INR 20000 which has not been paid using bank cheque or bank draft that are account payee and neither the payment was made electronically. Hence, the section become applicable and will attract penalties.|
|(b) This clause states that on the date on which a person receives a deposit or loan or specified some of money, if a previously taken loan or specified some of money or deposit from the depositor remains unpaid, the aggregate will be unpaid irrespective of whether the previous loan was given by depositor using a cheque or bank draft. In such a situation, the section becomes effective.||X gives a loan of INR 10000 to Y in 2015 by a cheque. The loan was not repaid by Y. In 2016, X again lends INR 10000 to Y but this time in cash. The aggregate will be counted as INR 20000 cash loan and the section will become applicable and hence, penalties will be applied.|
|(c) This clause states that if the aggregate of the aggregate in clause (a) and aggregate in (b) exceeds INR 20000 and the loan has been given using any other method other than the acceptable methods, the section will become effective.||Clause (a):
X gives a loan of INR 5000 to Y in 2015 in cash.
X gives a loan of INR 15000 to Y in 2016 in cash.
X gives a loan of INR 6000 to Y in 2015 by cheque.
X gives a loan of INR 14000 to Y in 2016 by cash
Aggregate of clause (a) and aggregate of clause (b) exceeds INR 20000 and hence, the section become applicable.
Basically, NEVER EVER give a loan exceeding INR 20,000 in cash. Use only and only the methods allowed for giving such loans. The allowed methods are:
- Electronic transfer of funds from one bank account to another.
- Payment by a bank draft, which needs to be account payee.
- Payment by a cheque, which needs to be account payee.
What Does Section 269T Say?
No receiver of loan should repay a loan in cash to the depositor. The repayment should be made only and only by one of the following methods:
- By a bank draft which needs to be account payee.
- By a cheque which needs to be account payee.
- By electronic fund transfer between bank accounts.
The receiver can be:
- A person
- A firm
- A cooperative society
- Any company
- A cooperative bank
- A banking company’s branch
Penalties will be levied if:
- If the repayment is made by cash and the repayment amount is INR 20,000 or above that.
- If the aggregate deposit or loan amount (inclusive of the interest to be paid, if any)held by a receiver in a banking company’s branch or in a cooperative bank or a company or a cooperative society or a firm on the repayment date, either on his or her own name or jointly with someone else.
Will Banks Report Cash Deposits to Income Tax Department?
This is a big question. Will banks report cash deposits to income tax department? The answer to this question depends on the amount of money you are depositing in the bank account. There are various conditions. These conditions are mentioned below:
- For any deposit amount below INR 50,000, no PAN will be required and the deposit is not reported to the Income Tax Department.
- For cash deposit of INR 50,000 or more than that, PAN will be required. There is no limit to how much money can be deposited but in case you are depositing any amount above INR 10 lakhs, the bank will report it to Income Tax Department. Also, banks may charge a fee for taking deposits of such big amounts.
Post demonetization, a couple of new rules have been introduced. These rules are mentioned below in a tabular format:
|Date Range||Cash Deposit||Previous Rule||Time frame|
|November 9, 2016 to December 30, 2016||Any amount over INR 2.5 lakhs will get reported at Annual Information Report. This is applicable in case of savings accounts. Current accounts are excluded from this rule.||AIR or Annual Information Report rule stated that any cash deposit exceeding INR 10 lakhs will be reported.||The time frame for any such deposit (current or previous rule) is any financial year.|
|November 9, 2016 to December 30, 2016||Any amount over INR 12.5 lakhs will get reported at Annual Information Report. This is applicable in case of Current accounts.||Current accounts were not at all included in the AIR reporting.||The time frame for any such deposit (current or previous rule) is any financial year.|
Income Tax experts say that you have too much cash amount in your hand then, you should deposit it in banks only and only if you are able to provide a source for that money. In case you can’t provide a source, the unaccounted money will then immediately call for scrutiny from the Income Tax Department and when that happens, the end result will not be a nice one.
What will happen if Income Tax Department catches hold of unaccounted money?
If that happens, Section 270A will kick in. According to this section, any unaccounted money will attract penalties. The amount of penalty that will be charged can be anywhere between 50% of the tax that has been evaded and 200% of the tax that has been evaded. This penalty is over and above the income tax that has to be paid.
If the Income Tax Department finds it necessary, the person who defaulted on tax payment may be prosecuted U/S 276C. Once a person is prosecuted, these things may happen:
- A fine may be imposed on the tax defaulter.
- In addition to the fine, the tax defaulter may be imprisoned for a period of 3 months or may be up to 7 years.
During the last budget, the government decided to increase the penalty rate from 100% to 300%. This decision was made reduce any litigation from the side of the assessees. Also, remember:
- If income has been under reported, the penalty charged will be 50%.
- If income is misreported, the penalty charge will be 200%.
Depositing Cash into Bank Accounts – The Sledgehammer of Demonetization
Post demonetization, the scenario in India has changed. Depositing money into bank accounts is no longer safe for those who have black money or unaccounted money. Government has clearly declared that the bank accounts of housewives, poor people, artisans and workers will be closely monitored. In case the government finds anyone parking the unaccounted money to those accounts, the person depositing the money as well as the person holding the account will be prosecuted. The government has also clearly stated that the Jan Dhan accounts which operate on zero-balance will also be monitored closely because there has been a sudden surge in deposit in those accounts after the announcement of demonetization. In case, anything suspicious is found in those accounts, the government will take action against both the depositor and the account holder. So, if you have unaccounted money, it is important that you do not deposit it in banks. You will get into trouble. Also, if you are depositing money as gift, you should be aware of the Gift Tax that you may have to bear.
A warning from the government – take it seriously
On November 18, 2016, the government clearly announced that artisans, housewives and holders of Jan Dhan accounts will have to take the heat of prosecution in case the government finds that those people have actually allowed others to misuse their own accounts. What type of misuse? Misuse here refers to allowing people with black money to deposit old Rs. 500 and Rs. 1000 notes within the 50-day window that the government gave. This widow will end on December 30, 2016.
The reason why government came up with this announcement is that after demonetization, people with black money started to deposit unaccounted money into other people’s accounts and thereby convert the demonetized currency notes into new notes that have been issued by the Reserve Bank of India.
It was previously announced by the government that tax scrutiny will not take place if the amount deposited in bank accounts is INR 2.5 lakhs or less because, the basic tax exemption limit is INR 2.5 lakhs. For those who have Jan Dhan accounts, the deposit limit was capped to INR 50,000.
After this announcement was made by the government, the Income Tax Department found out that people somehow developed a notion that no action will be taken by the government for any deposit that is either less than or is equal to INR 2.5 lakhs within the aforementioned period of November 9, 2016 to December 30, 2016.
To counter this, the government came up with another announcement wherein it was clearly stated that every account will be monitored and if somehow, it is established that the money deposited in the accounts do not belong to the account holders, the deposited money, even though it is within the basic tax exemption limit, will be taxed and the people who are illegally depositing money and people who are aiding such illegal actions by allowing misuse of their accounts will be prosecuted under the Income Tax Act.
It was earlier clarified by the Union Government that if black money is getting deposited in the bank accounts, taxes will be applied on such money and apart from tax, there will be a penalty of 200% of the tax amount. Apart from that, there will be interest deductions as well. So, if people are thinking that they can convert black money into white money simply by depositing the money into banks and converting them into new currency notes, people are simply wrong and they should not be lured into such actions as that may lead to severe legal actions.
What Happens When You Take Money as Gift?
People often think that if they are receiving gifts, they need not pay any kind of tax on that. It is simply wrong. The Income Tax Act in our country clearly states that in a given year, if the value of the gift received is more than 50,ooo rupees, the receiver of the gift amount will have to pay tax. They gift may be received in form of:
- Direct cash.
- Immovable property.
- Movable property.
- Shares etc.
However, if this gift is coming from specific people, as mentioned in the Income Tax Act, there will be no tax on it. Those people include:
- Sister or brother of a person or his or her spouse.
- Sisters or brothers of a person’s parents.
Will there be tax on every type of gift received?
No! Not every type of gift will attract tax. There are a few conditions under which the gifts you receive will not be taxed. Those conditions are mentioned below:
- If the sum total of the value of all the gifts that you are receiving is not exceeding Rs. 50,000 in value, you will not be taxed.
- If you are receiving a gift from a local authority, you will not be taxed.
- If you are receiving the gift in contemplation of death of the person who will be paying you the gift, you will not be taxed.
- If you are receiving the gift through inheritance or will, you will not be taxed.
- If you are receiving the gift during marriage, you will not be taxed.
- If a relative of yours is giving you the gift, you will not be taxed.
- If you are receiving the gift from any institution that has been listed under section 10(23C) of Income Tax Act, you will not be taxed. Some examples of such institutions include: foundation, fund, educational institution, university, trust, hospital etc.
- In case you are receiving the gift from a registered charitable institution, you don’t have to pay gift tax. However, the registration of the charitable institution should be under section 12AA.
Now, different people will say different things. Some will say that you should not show your gift in the Income Tax Return. However, it is suggested that you show your gift earnings in ITR. Those earnings should be listed under the head ‘Other Sources’.
There is a concept called gift income clubbing. What is it?
Those of you who file ITR, you must have heard of the concept which is known as Gift Income Clubbing. What really is that?
Well, a gift you receive may actually be capable of earning. For instance, a house may earn rent or even lead to capital gains if the house is sold. Similarly, if stocks are gifted, they will earn. Since certain types of gifts have earning potential, the question of income tax again comes in despite the fact that gift tax may be exempted. Let us take two scenarios to understand the concept of gift income clubbing. Ready for a tabular presentation? Here we go:
|Sl. No.||Scenario||Gifted Item||Income Generation Possible?||Income Will Be||Whose Income Is It?|
|1||X gifts a house to his wife, Y||House||Yes||Rent or Capital Gains||It will be income of Y (the recipient of the gift) or it will be the income of the person who gifted the house (that is X) provided the rent so generated or the capital gains so earned is shown as X’s income.|
|2||A (father-in-law) gifts a car to B (daughter-in-law)||Car||Yes||Can be rented out as taxi or it can be given on a rental to tourism industry or more…||It will be income of B (the recipient of the gift) or it will be the income of the person who gifted the car (that is X) provided the income so generated is shown as X’s income.|
In both the above scenarios:
- The recipient will be taxed if the income is shown as the recipient’s income and the income falls within the taxable slab.
- The person gifting will be taxed if the income is clubbed with his income. Here, tax will be applied on the total income (that is income after clubbing the income from the gift item with the original income).
Now, let us take another example.
Say Mr. X is married to Ms. Y. Ms. Y is unemployed. Mr. X decides to create an FD for Ms. Y. The interest that will be earned on the FD will be seen as income of Mr. X as the earned interest will be clubbed with income of Mr. X. However, if Ms. Y decides to take the interest income and then reinvest it to open a new FD, the interest earnings from the new FD will be the income of Ms. Y.
Similarly, say Mr. X opens an FD account for his sister Ms. Z who is unmarried. The interest that will be earned on the FD will be seen as income of Ms. Z as the earned interest will not be clubbed with income of Mr. X. Ms. Z may then decide to take the interest earning and use it to create another FD account. The interest earning from this new FD account will also be the income of Ms. Z.
So, depending on the scenario, income may be clubbed or may not be clubbed. You need to know those scenarios properly. This article will skip that part because discussing that in details remains outside the scope of this article.
A Big Question: How Do You Legally Keep Receiving Gifts Without Stressing Out About Tax Implications?
Who doesn’t love gifts? Everyone loves gifts, right? But gifts can attract gift taxes. So, how do you legally keep receiving gifts without stressing out about tax implications? There are a few things you can do (which are mentioned below) however, do not think that you can evade taxes completely. Don’t even try that. What you should do is just reduce complications. The things you need to do are:
- If you are giving or receiving a gift, there may be some documents (bills). Keep those bills. If there are gift certificates, you should get them as well.
- If someone is giving you a movable asset as gift, ask the person giving the gift to provide you with a gift deed. The gift deed needs to be stamped and then signed by the donor. The signature of two witnesses on the gift deed is a must.
- In case someone is giving you an immovable property as gift (for example, a house), ask the person to properly register the immovable property in your name and then give a gift deed which has to be stamped and also signed by the donor as well as two witnesses.
- It may happen that you are giving a loan to your friend who will be returning the money to you in a few months. If that loan amount exceeds Rs. 50,000, you should keep bank statements as proof or have IOU note (it is a legal promissory note) drawn. These will help you to prove that the loan was not a transaction that falls under gift tax.
- In case you have transferred some money to your colleague or friend using your debit card or ATM card and later, the person transferred back the money to your account. If that happens, you should always keep the transaction slips with you. Those slips will help you to prove that the transaction that took place does not come under gift tax.
Bottom Line: Gifts don’t always come with happy ending. Be sure to follow rules otherwise, you may attract attention of Income Tax Department and once that happens, you may have to go through a lot of hassles. You will definitely want to avoid troubles, won’t you?