Large cash deposits and high-value financial transactions do not automatically result in an Income Tax notice. However, banks and other financial institutions are required to report specified transactions above prescribed limits to the Income Tax Department under the Statement of Financial Transactions (SFT). If these transactions do not match the income disclosed in your Income Tax Return (ITR), they could trigger scrutiny or a request for clarification.
According to tax experts, cash transactions generally face greater scrutiny than digital payments because they are more difficult to trace.
While UPI, NEFT, RTGS and other online transfers leave a clear audit trail through banking records, large or unusual digital transactions can also attract attention if they are inconsistent with a taxpayer's reported income or financial profile.
Under the SFT framework, banks, mutual funds, companies and other specified entities are required to report the following high-value transactions to the Income Tax Department:
Cash deposits of ₹10 lakh or more in savings accounts during a financial year.
Cash deposits or cash withdrawals of ₹50 lakh or more in current accounts during a financial year.
Fixed deposit transactions of ₹10 lakh or more.
Cash payments of ₹10 lakh or more for bank drafts, pay orders, banker's cheques or RBI-issued prepaid instruments.
Cash payments exceeding ₹2 lakh for the purchase of goods or services in a single transaction.
Cash payments of ₹1 lakh or more towards one or more credit card bills.
Credit card payments of ₹10 lakh or more made through non-cash modes during a financial year.
Investments of ₹10 lakh or more in bonds or debentures (excluding renewals).
Share purchases, including share application money, of ₹10 lakh or more.
Share buybacks worth ₹10 lakh or more received by an individual, excluding shares purchased through the open market.
Investments of ₹10 lakh or more in mutual fund schemes, excluding scheme-to-scheme transfers.
Purchase or sale of immovable property valued at ₹30 lakh or more, based on stamp valuation.
Purchase of foreign currency or loading of forex cards amounting to ₹10 lakh or more in a financial year.
Overseas spending of ₹10 lakh or more through debit cards, credit cards, traveller's cheques, drafts or other modes.
There is no separate reporting threshold specifically for UPI, NEFT or RTGS transfers under the SFT rules. However, if the value or frequency of these transactions appears inconsistent with a taxpayer's declared income, they may still be examined by the tax authorities.
Experts say that digital transfers linked to business income, investments or other financial activities should be supported by proper documentation.
Once reported under the SFT framework, the details appear in the taxpayer's Annual Information Statement (AIS) and other tax records.
The Income Tax Department compares this information with the income and financial details disclosed in the ITR. Significant mismatches may result in a notice seeking an explanation or supporting documents.
To avoid difficulties during scrutiny, taxpayers should maintain adequate records explaining the source of funds. These include:
Bank statements.
Bills, invoices and receipts.
Loan agreements.
Gift deeds.
Property sale and purchase documents.
Books of account and vouchers for business receipts.
Payment references and contracts relating to online transfers.
Maintaining a clear money trail can help establish the legitimacy of transactions if questioned by the Income Tax Department.
Tax professionals say notices are often triggered not because a transaction is illegal, but because taxpayers fail to explain it adequately.
Some common mistakes include:
Depositing large amounts of cash without proof of the source.
Ignoring entries in the Annual Information Statement.
Reporting business receipts as personal transfers.
Failing to reconcile high-value transactions with the income declared in the ITR.
Keeping financial records updated and ensuring that reported income matches banking transactions can significantly reduce the likelihood of receiving an Income Tax notice.