If your income is high but withdrawals and transactions are very low, then the Income Tax Department may have its eyes on you. Income Tax officials are paying attention to cases where there is a big difference between declared income and spending pattern. If a person’s declared income is high, but cash withdrawals or digital spending is low, then it can be considered a sign of undeclared income and investigation may start.
According to CA (Dr.) Suresh Surana, high-income individuals need to ensure that their withdrawals and digital transactions align with their declared income to avoid scrutiny from tax officials. “A significant mismatch between the income report in the tax returns by the taxpayers and their spending patterns, such as low cash withdrawals or minimal digital transactions despite high earnings, may raise concerns about undeclared income, leading to potential scrutiny or tax investigations.”
What to do to avoid tax investigation?
If you want to avoid coming under investigation, keep the following things in mind:
- Declare all income sources
File all income like salary, rental income, capital gains, business income, interest and dividends correctly in your Income Tax Return (ITR). If the income is under-reported or misreported, it can raise suspicion.
- Maintain proper financial records
Keep a complete record of cash withdrawals from the bank, UPI payments, credit card expenses, and other financial transactions. If the Income Tax Department makes any inquiries, it is important to have the right documentation, says Surana.
- Avoid excessive cash transactions
Surana suggests taxpayers to keep banking and digital transactions in line with their actual income and lifestyle. If there are sudden large cash deposits or an unexplained increase in bank balance, it may raise suspicion.
Possible consequences of difference in declared income and transactions:
If a person’s reported income and his banking or digital transactions show a big difference, it can have serious consequences:
- Tax notices and scrutiny
The Income Tax Department can send notices under sections 131, 133(6), 133A, 132 and 143(2) and initiate a thorough investigation.
- Re-assessment and investigation
If any irregularities are found, the department may re-examine the entire taxable income of the person.
- Penalty and interest charges
If undeclared income is found, a hefty penalty can be imposed under section 270A.
Penalty up to 50% on under-reported income.
Penalty up to 200% on mis-reported income.
Also, additional interest may have to be paid under section 234A/B/C.
- Prosecution and jail for tax evasion
If the income is deliberately concealed and the amount is more than Rs 25 lakh, then under section 276C, there can be a jail term of 6 months to 7 years, Surana explained, adding that in other cases, there can be a jail term of 3 months to 2 years.
- Impact on banking and credit score
If one has to face frequent tax investigations, then monitoring of one’s credit score and financial transactions may increase.
Also read: Can tax officials ask you about daily rations and toiletries? Here’s what experts say
What are the reasons for the Income Tax Department to keep an eye on you?
Some transactions can prove to be a red flag for the Income Tax Department. These include:
- Large digital payments
If a person has UPI, credit card or online transactions of more than Rs 10 lakh in a year, it is reported in the Financial Transaction Statement (SFT) and the Income Tax Department can see it in the Annual Information Summary (AIS) and Tax Information Summary (TIS).
- Purchase of expensive goods
If a person is buying expensive cars, property, designer brands or gold and silver, but his declared income is very low, then it can raise suspicion.
- Large cash transactions
If a person has a cash deposit of more than Rs 10 lakh in his savings account or more than Rs 50 lakh in his current account, then this information is sent to the Income Tax Department.
- Big investments in the stock market or crypto
If a person is trading in stocks, derivatives or cryptocurrencies in large amounts but is not reporting it properly in the ITR, then it can come under scrutiny.
Summing up
If you want to avoid tax scrutiny and unnecessary notices, report your income correctly and keep all financial documents safe. Paying taxes honestly is not only a legal obligation, but it is also the best way to avoid any trouble in the future.