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Demonetisation – Beware of 7 Most Common MYTHS and Misconceptions

Post Demonetisation, i received numerous queries on how it will impact the property and other investment options. I discussed it in brief in my earlier posts. Besides genuine concerns, there is a lot of confusion, doubts, myths, rumors, and misconceptions among people with large cash holding. Though it is not possible to cover all these points in a single post. I will try to cover 7 most common myths and misconceptions about demonetisation.

Demonetisation – Beware of 7 Most Common MYTHS and Misconceptions

1. Demonetisation is Black Money Amnesty Scheme:

This is most common misconception that demonetisation is a sort of amnesty scheme to convert black money to white money after tax payment. In other words, declare your black money/cash, pay tax and it will be converted to white money. Let me clarify, it is not correct.

One of the key objectives of a demonetisation is to flush out black money from the system. On the other hand, any cash amount you are depositing with the bank should be accounted/white money. There is no harm in holding the large cash provided you paid tax on the same. In the case of any clarification or query from Income Tax department, you should be able to explain the source of money.

To summarize, demonetisation is not a black money amnesty scheme. If you will not able to explain the source of money then you should be ready for following penalties

(a) Penalty of 200% on tax amount

(b) Jail Term from 3 months up to 7 Years depending on the severity of tax evasion

2. I can deposit Money in Multiple Bank Accounts to avoid scrutiny:

In my personal opinion, it is childish to think that if you deposit the money in multiple bank accounts than you can escape the eyes of income tax department. Always remember that bank accounts are linked to the Permanent Account Number. Your account no with income tax department is PAN. 

The taxman will enter your PAN in the system and entire financial kundali will be in front of him. One of my clients emailed me that he had 12L in CASH. I am not sure whether it was accounted or unaccounted. He has 5 bank accounts. He deposited 2.4L in each account. His perception was that cash deposit of up to 2.5L against each bank account will not be scrutinized. I will answer this in next point.

To summarize, the taxman will check the cash deposits against each PAN not against the bank account. You can deposit Rs 49,000 in 20 bank accounts but from a tax perspective, it will be considered as a deposit of 9.8L. If the money is unaccounted, you can expect taxman at your doorstep. Therefore, deposit in multiple bank accounts will not help.

3. Deposit of up to Rs 2.5L will not be scrutinized

I agree but NOT IN ALL CASES. The reason behind this magical no of 2.5L is basic exemption limit of 2.5L provided under Income Tax Act 1961. For example, i have 2.5L in CASH and i never filed income tax return. For a minute assume that it is black money still income tax department cannot do much in my case. I can always give a justification that my income is under basic exemption limit and is nontaxable. The food for thought is can you give same justification in all the cases. The answer is NO.

Let’s take the case of an individual with an annual income of 5L. He has unaccounted or black money of 2.4L in CASH. Now he deposits this 2.4L Cash in the bank account after demonetisation. There is a common misconception that he will not be scrutinized. In my opinion, it is not a correct understanding.

The income tax department can always ask him the reason for holding the cash depending on income level. An individual with an annual income of 20L holding CASH of 2L is perfectly okay. If any individual who declared an income of 5L but holding a cash of 2.4L cash is suspicious provided there is a valid and justified reason for the same.

Therefore, you can also expect income tax notice in case of a cash holding of less than 2.5L if it is suspicious or not justified in the eyes of income tax department. If you are a housewife, small trader etc. i.e. outside tax net then you can justify the cash holding of 2.5L under basic exemption limit.

4. Multiple Transactions:

Here people are acting smart. Post demonetisation they are depositing cash under Rs 50,000 through multiple transactions. It is because PAN is not required for a cash deposit of less than Rs 50,000. Alternatively, this point is more apt for people exchanging cash through multiple transactions. Quite smart indeed but income tax department is smarter than you. If you are not quoting PAN then the bank is demanding Aadhaar card or any other KYC document. Therefore, income tax department can easily find out how much cash you exchanged.

Multiple transactions will raise more suspicion. Therefore, if you have nothing to hide then you can deposit the cash in a single transaction rather raising suspicion in the mind of a taxman.

5. Open Fixed Deposits:

Another masterpiece from people. It is a myth that only cash deposit in a savings account will be scrutinized. Therefore, people found a noble way and are opening fixed deposits. Yesterday, my friend told that one of his acquaintance opened 5 Bank Fixed deposits of 3L each every alternate day in last 10 days i.e. she deposited 15L.

The reason for this noble act is that her personal banker suggested that if she opens the Fixed Deposit and the bank will deduct 10% TDS on fixed deposit. Therefore, as tax i.e. TDS will be deducted therefore she need not worry as she is paying tax. In reality, she does not know that she is being misled by her personal banker.

6. I can deposit cash in bank account of my friends or family members:

This is another blunder. As i understand income tax department must have a family tree (including friends) of an individual in most of the cases. The only exception is you never did any transaction with any of your close relatives or friends. Here by the transaction, i mean any type of financial transaction like cheque deposit, online transfer etc. This is my personal conclusion.

For example, i transfer money to my wife or my father transfer x amount to me. Therefore, from my PAN details, the income tax department can easily find out that transaction is done by my father. Besides PAN, family tree details can be linked through nominations, frequency of transactions, KYC etc.

Therefore, with an assumption that income tax department can easily create a friends and family tree of an individual. It is not advisable that after demonetisation you should deposit the demonetised currency in your friends and family members bank account. You will be putting your friends and family members in RISK.

For a second, if you somehow escape the tax net. You still carry a risk that your friend or family may refuse to return the money in future :). Though in my opinion, at first level only it is impossible to escape the tax net. Lastly, in such cases, jail term will be harsh i.e up to 7 years.

7. Unofficial/Illegal/Unauthorized Transactions:

This is the basic problem in India. First, we always try to find out the escape route. There are a lot of news reports that post demonetisation, people are converting demonetised currency through the grey market. The best part is that they think that they will escape the tax net or can fool around with income tax department.

In my opinion, it is next to impossible. Post demonetisation, the share of cash transactions will reduce in the financial system. The income tax department started keeping track of CASH transactions. I shared it in my previous post on demonetisation. You will say that it is not a foolproof system. I will say NO, it is fool proof system. Someone will definitely pay the price of black money sin.

Here i would like to share 2 examples. Based on the complaint of income tax department, police has arrested large no of bank employees who flouted rules and exchange the demonetised currency beyond permissible limit. In one of the case, a bank employee exchanged 8L currency post demonetisation. He gave a reason that he exchanged for himself. Unfortunately, such a logic does not work with income tax department.

In the 2nd example, people who are involved in this illegal demonetisation currency exchange are paying the price. All these transactions are happening within known circle and the people who are arrested can spill the beans. The person who sees a business opportunity in demonetisation will be a govt guest in jail.

Therefore, point i am trying to make is that there is a record of every single currency exchange. Now you must be wondering how the income tax department will know. For example, person A exchanged Rs 10L through the illegal channel. The IT department has a record of cash transactions of person A. If the money is deposited in any bank account after demonetised currency exchange & if it will not match with the records of Income Tax department then the person A will be in deep trouble. He maybe asked to prove the source of income and whether the tax is paid or not.

The best part this time is that income tax department is keeping a record of currency exchange at the source. Therefore, the apprehensions of people that demonetisation will not STOP black money is uncalled for. I can write a complete post on demonetisation i.e. how it will work but may be it is not an appropriate time.

Words of Wisdom:

There is NO ESCAPE route this time. Someone has to pay the price for black money sin. Demonetisation is a welcome step to eradicate black money from the system. Some financial planners are suggesting that it is better to destroy the black money rather regret in future :). The Govt has already tightened its noose on Benami Property Holders. In my opinion, next surgical strike will be on Bank Lockers and Gold.

Please note that conclusions and interpretations shared in this post are purely my personal views. Please check disclaimer available on this site. 

Copyright © Nitin Bhatia. All Rights Reserved.

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7 years ago

Thanks for info. However if hoarder just keeps new currency post conversation through illegal sources, how will he get caught?

There are many news flashing on tv about agents working on 30-40% basis apparently so confident about their ‘business model’. Hope our bureaucracy will emerge more loyal & devoid of corruption in near future :)

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Maddy

The govt will further reduce the limit of cash transactions to 2L or 3L very soon and may limit cash holding per person. Therefore, hoarder will be forced to bring the money in formal banking system. At this point, he/she will be caught. The only escape is to keep money away from formal banking system and that will not be feasible for too long.

The people who are converting illegally will be caught very soon as govt has record who withdrew how much cash.

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