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Demonetisation Scheme – How It Will Impact Your Money Matters

Demonetisation Scheme is a sort of surgical strike on the black money. As a taxpayer, i can say that people should not complain short term pain for the long term gain. There is a lot of uncertainty on how the things will shape up. Let me assure that if you have nothing to hide from income tax department then you need not worry at all. Just relax, take a deep breath and chill. You can deposit cash in hand i.e. currency notes of Rs 500 and Rs 1000 once the initial knee-jerk reaction is over. Don’t forget to quote your permanent account number.

One of my clients called me from Lucknow. He withdrew Rs 4L cash for home renovation. The entire money is white only. Somehow he postponed the idea of home renovation because of mother’s illness. After the Income-tax Department Advertisement that all the cash deposits above 2.5L will be scrutinized he is scared to deposit it back. I told him that he need not worry. He can always explain that he withdrew the amount for home renovation but after demonetisation scheme is announced, he has to exchange the currency notes of Rs 500 and Rs 1000. Therefore, the point i am trying to make is that if you have money that is in white and you can explain the reason for holding cash then you need not worry.  You can deposit any amount without fear.

As readers can make out from my past blogs that i am a cashless person and a big advocate of cashless economy. You will not believe that i spend only 5% of monthly household expenditure in CASH. At any given point of time, i carry only Rs 800 – Rs 1000 in my pocket. I am very happy with demonetisation scheme. Therefore, i am not concerned about operational part of demonetisation scheme i.e. shift from Cash only to Cashless mode. I am more concerned about interest rate movement that i will discuss later in the post. In this post, i will discuss how demonetisation scheme will impact your money matters.

Demonetisation Scheme – How It Will Impact Your Money Matters

1. Black Money and Cash:

There are two schools of thought in this regard. The first set of tax consultants is suggesting to destroy all the black money you have. Because of this reason you might have seen news reports of a bag full of Rs 500/Rs 1000 is found at so and so place. There are news reports that people are burning cash in open grounds etc.

The 2nd approach is to declare the cash under demonetisation scheme but many people fear jail term besides 200% penalty. Your previous returns may come under scrutiny. Therefore, it is a catch 22 situation.

Another important development is that department of income tax has started tracking your cash transactions. You can visit >> Compliance >> Accounts with cash transactions

Therefore it will have 2 impacts

(a) You cannot use the black money now as it can be tracked easily. Your cash transactions will be reported to department of income tax

(b) Post demonetisation scheme, if you are a cash person then better to shift to cashless mode. Cash usage always raises suspicion even if the amount is white. For example, in the case of my client, the income tax department can always ask why you withdrew so much cash and for what purpose. You may not be able to answer in most of the cases.

2. Lower Interest Rates:

Demonetisation scheme will bring some cheers to the loan borrowers. It is expected that cash in circulation will decrease as India will move towards a cashless economy. Therefore, more and more people will deposit the “cash in hand” with the bank i.e. similar to Jan Dhan Yojana. More supply in banking system means banks will have more funds to lend. Thus, they will lower the interest rate.

Also, it is expected that RBI will further cut the repo rate as the inflation will cool off post demonetisation scheme. The people will have less money in hand to spend thus reduce demand.

3. Deposit Rates:

Bad news for savers. After demonetisation scheme, the interest rates on small savings schemes and FD‘s will also decrease. Though it also depends on the quantum of fund flows to the banks. I am already receiving messages from banks to book 390 days FD @ 7.25% and rates are valid only for few days.

Personally, i am expecting a cut of around 2% in next 24 months provided there is NO another intervention like inflation, jitters in world economy etc.

4. Property:

I shared it in detail in my previous post, the impact of demonetisation scheme on the property market.

5. Gold:

Gold is considered as an alternate currency. The price of Gold is decided internationally. In India, it is impossible to manipulate Gold Prices. In my post, i shared 10 reasons why Gold Prices will double in 2 years. Now there is an 11th reason i.e. the lack of faith in the currency. As i mentioned that people who have cash of more than 2.5L even in white are now fearful to deposit it in the bank. It also includes NRI’s. Secondly, in future people will not prefer to keep cash savings. In such a scenario, only option left is to invest in Gold. Gold can replace Cash as “Cash in Hand” for an emergency situation. Therefore, the demand for gold is all set to increase. The gold prices will increase provided govt does not come out with any adverse policy on Gold like limiting the gold holding.

Recently there is a buzz in social media circles that Govt is planning to ban imports of Gold. Basically, this to stop people from converting their black money to gold. Though it is only a rumor at this stage and no one can predict its impact on gold price. In my opinion, any blanket ban will reduce supply thus positive news for gold. Another option for govt is to increase import duty. This will be good news for the gold and gold prices will increase in the same proportion. Only negative development can be if the Govt restricts gold holding per person. Last but not least, the uncertainty due to international developments will add fuel to the gold price.

In my opinion, the downside in gold is limited because if gold slide then it will be a big question mark on the success of future issues of Sovereign Gold Bonds and Gold Monetization Scheme. The psychology of Indian investor is that if they are investing in Govt Scheme then their money is completely safe. Any losses to existing Sovereign Gold Bonds investors means the poor uptake of future issues.

6. Equity:

The demonetisation scheme will not have much impact on the stock market but international factors will weigh more. In the case of fed rate hike, there will be a huge outflow. Secondly, uncertainty due to the election of Donald Trump will keep the stock market under check.

Words of Wisdom:

After demonetisation scheme, the investors have very limited options in hand. As i keep highlighting in my posts that with each passing day, it will become difficult to generate double-digit returns. The risk factor is increasing. The investors are losing faith in more and more asset class. The “Safe Havens” are NO MORE Safe. The conservative and risk averse investors are locking their money in Fixed Deposits and brave hearts are betting on Gold. Only time will tell, what the future has in store for us.

Copyright © Nitin Bhatia. All Rights Reserved.

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Viresh Arora
Viresh Arora
7 years ago

Dear Nitin
I have certain queries below
1) If upto 2.5 Lacs can be deposited without fear of account being questioned or scrutinised as advertised by the Government or is there a catch in such statement. Some say government might also ask to declare the amount deposited during the period in the new form and then this amount could also be questioned or would attract penalty.
2) I am NRI and as such dont file return because have no income from India. So my wife who is also working. We hold account jointly, so can we deposit 2.5 lacs each in our account or just 2.5 L being joint one.
3) Can we deposit the same amount in our children, one of them is 17 years old, or there is a restriction, as it would be clubbed with my income.
4) Anyamount over above 2.5 Lacs would be treated as undisclosed income, and a tax of 30.6% with applicable penalty.
5) Is it advisable to spread 10 lacs in 4 different accounts or depositing in one, woild be prudent as I would like to be served notices for 4 deposits, being stationed abroad.

I shall look forward to your advise.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Viresh Arora
Swati Singhi
Swati Singhi
7 years ago

Hi Nitin, a very detailed post as usual. I am a noob in investment world and your posts are very informative and knowledgable.

Is it advisable to invest in Mutual funds now (in lumpsum), I am already doing a couple of SIPs. Can you suggest some good mutual funds that I can buy in lumpsum at this time.

Nitin Bhatia
Nitin Bhatia
7 years ago
Reply to  Swati Singhi

It is not right time to invest money in mutual funds..Here i am assuming you are referring to equity mutual funds..FII’s are pulling out money from Indian Stock Market. Wait for market to stabilize.

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