Nov. 8, 2016 would be remembered as the day India carried out its 'Second Surgical Strike' in a span of just 1.5 months, but this time within the peripheries of its own National Border. Perhaps, this one coming as a bigger surprise than the ones carried out on Pakistan, and this one doling out bigger upsets nationwide, a daring move by the Prime Minister of India, and the one that certainly destroyed more terrorists and related attacks than the one carried out on Sept. 29, 2016 on Pakistan. As the nation was moving forward with its early dinner plans, Prime Minister Narendra Modi addressed the 125 crore nation to discuss certain important decisions to curb black money and counterfeit money issues plaguing the country since ages. The 500 and 1000 Rupees notes were discontinued with immediate effect, and hence, seized to be a legal tender in the whole country. People were supposed to exchange them with banks, in return for a new 500 and 2000 Rupees notes. Chaos, and mayhem followed.
Social media burst with news within minutes of the announcement, people flogged to ATMs, jewelry shops, petrol pumps, and other relevant places in order to get the best value out of the last piece of money, they had held since almost forever.
Soon after, RBI regulations were released explaining details regarding how one could exchange money, how much money could be exchanged, what was to be done with old money, and the like. What caused an utter confusion, were the following tweets by the Twitter handle of Ministry of Finance:
1. "We would be getting reports of all cash deposited during 10th Nov to 30th Dec.2016 above threshold of Rs.2.5 lac in each A/C."
2. "Income Tax department would do matching of this with income returns filled by the depositors. And suitable action may follow."
3. "If cash amount of above Rs10 lac is deposited in a bank A/C,not matching with declared income,same will be treated as tax evasion"
4. "In such case,tax amount plus a penalty of 200% of the tax payable would be levied as per Section 270(A) of the income tax Act."
These tweets have caused a nationwide uproar, mostly because people have been misunderstanding it, and more so because the media is exaggerating these lines to make out a whole new meaning, which is an utter shame on the part of a source which maximum proportion of the nation depends upon.
So, my attempt here would be to really analyze what these tweets mean, what are the consequences of depositing various amounts of money, and what actually needs to be done. Before that, if you doubt the credibility of this blog post, I would like to introduce you as to why you can trust me, and how much correct could I be. I am a Chartered Accountancy student, who has passed the Intermediate stage, and has completed 1.5+ years of articled training, and hence know a thing or two about Income Tax, and related stuff. Additionally, I have read various articles, contacted my firm's partner, and made every attempt to make sure whatever is written in this article is 100% true. Despite my efforts, some or the other mistakes might creep in, so if you spot one, please ping me about the same in the comments section below. Now, without much further ado, let's start off with the main purpose of this article.
I. Coming to the first tweet, which says that the Finance Ministry would be getting reports of all the cash deposited between 10th and 30th December, 2016.
What people are misunderstanding: ANYONE who deposits more than 2.5 lakhs in cash in their bank accounts would come under the eye of Income Tax Department, 200% penalty and taxes would follow (this, thanks to the media).
Why it is a misunderstanding: To understand why this perception of people is a misunderstanding, we need to first understand why this exact amount of Rs. 2.5 lakhs was chosen by the Govt. Rs. 2.5 lakhs is not any arbitrary amount. In fact, it is the maximum tax exemption limit for an individual's income. What this means is, any individual having an income of upto Rs. 2.5 lakhs is exempted from levy of income tax. Now, this is where the misunderstanding part comes to play. If you are an individual, whose income does not exceed 2.5 lakhs, and hence are not liable to pay income tax, you can deposit your savings of upto 2.5 lakhs in cash into the banks, which is a legit amount for a member with this low income, as his saving, in normal circumstances should not exceed this amount. Similarly, this limit should go up to Rs. 3 lakhs for senior citizens, and accordingly, as much amount can be deposited.
II. The second tweet where they mention, that IT-D would do matching of income returns filed by the depositors.
What people are misunderstanding: The government will suddenly spring into action, and start monitoring various bank accounts held by the individuals and lots of money would be tracked.
Why it is a misunderstanding: The fact is, the government has been doing this since years, maybe it did not declare it this openly, or maybe people just did not notice the same happening as it wasn't really THAT big a deal previously. Whenever, an individual or any other entity files an Income Tax Return, he/she is supposed to provide their bank account details in the same, along with their PAN so as to enable the government to keep tracking down on conspicuous transactions, if any. Also, the banks have been required to note down the PAN of individuals involving in a high transaction amount and report the same to the Government.
That's it for the Part I of this series, I will post one or two more of this, as required,in order to explain the demonetization policy and its impacts. In the next post, I will explain the main point of concern for most of the individuals: Penalty imposition.
You can read Part II here : Understanding Demonetization, and Penalties Attached Therein. Part - II.
You can read Part II here : Understanding Demonetization, and Penalties Attached Therein. Part - II.