Unexplained cash in your bank account? The tax penalty could reach 83%
New Delhi: If you’ve made a large, unexplained cash credit to your bank account in the past year, you may have to pay heavy tax on that amount if IT finds it.
In accordance with tax rules, any money credited to the taxpayer is eligible for tax, unless it is specifically exempt. If such a tax credit is not offered by the taxpayer, he must explain the reason and also cite the source of the credit. Knowing the source of income is relevant because unexplained cash in your bank account can lead you to pay a heavy tax.
Income tax is levied on five categories of income: wages, real estate, business / professional income, capital gains and income from other sources. There are provisions in the Income Tax Act to penalize tax evaders. These categories, except for capital gains, relate to income and you have to pay tax on them. Capital gains relate to the tax on fixed assets.
According to Section 69A of the Income Tax Act, if it turns out that a person possessed silver, gold, jewelry or any other item of value during the previous year which is not recorded in the books or for which the person has not provided any explanation as to the nature and source or if the assessing officer is not convinced by the explanation, then the money and the value of the precious metal, jewelry or any other item of value may be deemed to be the taxpayer’s income for that year.
In accordance with income tax rules, this unexplained money is subject to high income tax at the rate of 83.25% (60% tax + 25% surcharge + 6% penalty). Unexplained cash credit is treated as income in the year it is received and taxed at the flat rate of 60% without benefiting from the basic exemption ceiling, regardless of the tax regime. There is a 25% surcharge and a 6% penalty, so the final tax rate is 83.25% (including tax).
“If you have unexplained income on your books, that is, you receive a credit on your books and you are not able to satisfactorily explain the source and reason for the credit, this amount is taxed at a special flat rate of 60% in accordance with article 115BBE. After the overcharge and cessation application, the maximum effective tax rate reaches 85.5% ”, said Kush Vatsaraj
“A penalty of 10% of the tax is payable if the unexplained income is not self-declared by the assessed person in his tax return, bringing the total tax plus penalty to 94% in such cases”, a- he added.
Note that no deduction / allowance is allowed and no loss can be deducted from such unexplained cash credit which is considered income. The 6% penalty is not levied if an unexplained cash credit is already included in the tax return and tax on it is paid no later than the end of the relevant fiscal year.
Apart from money, gold and other valuables, any cash credited to the taxpayer’s books, for which there is no explanation as to the nature and source, is also heavily taxed at a rate of 83.25%. If the tax administration is not satisfied with the explanation provided by the taxpayer, unexplained cash or jewelry is taxed at the aforementioned rate. Such a cash entry is referred to as an “unexplained cash credit” under section 68 of the Income Tax Act.