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Will I Lose All My Money To Tax When I Deposit Old 500 Rupee Notes?


Yesterday, RBI and the government banned Rs. 500/1000 notes. This was to reset existing black money to zero, as we showed in a detailed article.
Banks are now open – but people are confused about an income tax impact on the cash they deposit. How much can I deposit? Will I get taxed on whatever I deposit? Is all the cash assumed to be illegitimate?
Here’s our attempt to answer these.

How much can I deposit?

Any amount of money. You can take massive bundles of Rs. 1,000 notes and deposit them. You can only take out Rs. 4,000 in “new” notes, but the rest will go into your bank account. Which has your PAN number.
The Revenue Secretary, Hasmukh Adhia, has said that such deposits will require to be disclosed, if they are income. (You can’t be having an income of Rs. 100,000 per year, and suddenly deposit Rs. 5 crores and say it’s savings or something).
But, to keep things simple, they are only monitoring banks for deposits greater than Rs. 250,000. That would make sense – most people do keep a few lakh rupees at home, especially older folk, to take care of expenses.

Will I Get Taxed? How Much?

If the money is just from your savings (and you can prove it) then it’s fine. Under 250,000 there probably won’t be a need to prove it either.
If it’s more, then you can deposit it, but you must declare it as income. If you don’t declare it – and you have nearly one year to file next year’s returns – you can be hit as much as 92% of the money.
Because the structure is: the tax is 30%, and there’s a 200% penalty, which addes up to 90%. A 3% cess on that means a total tax of 92.7%.
For such incomes above Rs. 1 cr, there’s a 12% further “surcharge”. Which takes the tax to 103%. That will hurt because you pay the full money as tax and then some more to make for the penalty and surcharge.
If the money you have is unaccounted, it’s best to declare it as income in this year and pay 30% tax on it.
You have to hope that the income tax department doesn’t go into insane levels of detail and find out that no, this was money that you made in a previous year instead. Declare it, pay the tax – that’s just easier to do.

Is Cash Legitimate?

Yes. Cash is not a bad thing. You can deposit any amount today. In three months, when all restrictions are gone, you can withdraw all that money and put it again inside your house, in new 500 rupee or 2000 rupee notes. This is fully legal.

Will They Track The New Notes?

No. Mostly because they cannot. There is no chip, no GPS device, no nothing embedded inside the new notes.
Cash is anonymous. If it were not, it would be a bank account.

What about Marriages?

Gifts received on marriages are tax-exempt, as of now. If this avenue is used to launder black money – i.e. that brides/grooms get massive cash which is legitimately deposited but returned later – this will see new IT rules  on it.

New and illegal Business Models

Today, we see new business models emerging. People with black money are willing to take discounts on their suitcases of cash – now mostly useless because they can’t deposit in a bank without being caught, and can’t use it as it’s not legal tender. So much that a Zaveri Bazaar jeweller was offering 5 or 6 Rs. 100 notes for a Rs. 1000 note, and he was getting buyers – a 40% to 50% discount!
Jewellers everywhere are doing this now – offering gold at Rs. 45,000 when the market price is about 30% lower, if you pay in the now-invalid notes. The idea? You’re not going to get them to be of use anyhow, so pay a premium – which effectively means your black money is worth a lot lesser.
Big retailers are keeping shops open late, too. This, so that you can buy stuff with this money, while there is a window of opportunity. If you have that black money that will “vanish” after March 2017, you might as well spend it.
What Will The Retailers/Jewellers Do With The Notes?
They are legit businesses. They usually do have legit cash that people give them. They’re now happy to take your old 500/1000 rupee notes, and if a tax-person asks, the answer will be that they had the cash with them before this was announced.
Note: Jewellers are being investigated for selling withough taking appropriate PAN cards etc.

Can I Use Multiple Bank Accounts To Deposit Money?

Every bank account has your PAN number. Depositing Rs. 200,000 into multiple accounts is not an answer. Evenutally the Income Tax dept will get to know if they run a query appropriately.

Our View

Don’t go around doing illegal things with black money. If you have it, just deposit the money and pay the 30% tax, and declare the income.
For small amounts – less than 2.5 lakh – even if it *is* black, don’t worry. Just deposit it and continue life as usual. It’s not a big enough deal to worry about.
And don’t do shady things like buying big amounts of things from jewellers without receipts, or having multi-bank accounts to to override etc. These will just get you in trouble.


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