Do you believe that an income tax notice gets triggered only when you deposit large sums of cash? Think again. Even legitimate transactions made through UPI, NEFT, RTGS or IMPS can come under the Income Tax Department's scanner if they don't match the income reported in your ITR.
Let’s explore when digital transactions invite scrutiny, and how to avoid unnecessary notices.
Can UPI, NEFT, RTGS or IMPS transactions trigger an income tax notice?
These days, we mostly make payments digitally, and it’s a worry for everyone if it can trigger an income tax notice.
“A recent example that gained attention involved a taxpayer who made credit card payments exceeding Rs 50 lakh without filing an income tax return. Since no income had been reported to explain the source of funds used for these payments, the transaction was flagged by the system, resulting in an income tax notice seeking an explanation,” explains Neeraj Agarwala, Senior Partner, Nangia & Co LLP.
Simply transferring or receiving money through banking channels such as UPI, NEFT, RTGS or IMPS does not automatically trigger an income tax notice.
The Income Tax Department is generally concerned not with the mode of payment, but whether the transaction matches the income and financial information reported by the taxpayer.
The Income Tax Department cross-verifies financial information received through the Statement of Financial Transactions (SFT), the Annual Information Statement (AIS), Form 26AS and other information-sharing mechanisms to identify mismatches.
CA Milin Bakhai, Partner, Direct Tax, N. A. Shah Associates LLP, points out some common situations that may attract scrutiny:
- Receipts on which tax has been deducted at source (TDS) and which are reflected in Form 26AS or the AIS but are not offered to tax or otherwise appropriately disclosed in the return of income
- Frequent or substantial digital credits in bank accounts that appear to represent business receipts or professional income but are inconsistent with the turnover or income reported in the return
- Property or other high-value purchases funded via NEFT/RTGS that don't reconcile with declared sources of funds
- Payments received have TDS deducted which are visible in Form 26AS/AIS but aren't reflected in taxpayers’ income
High-value transactions that are reported to the Income Tax Department
Certain high-value financial transactions are reported to the Income Tax Department by banks, financial institutions, mutual funds, companies, registrars, and other specified entities under the Statement of Financial Transactions (SFT) framework.
This reporting helps the department verify whether a taxpayer's financial transactions are consistent with the income disclosed in their income tax return.
| Transaction | Reporting Threshold |
| Cash deposits in one or more savings accounts | For a person having PAN: ₹10 lakh or more in a financial yearFor a person not having PAN: ₹5 lakh or more in a financial year |
| Cash deposits or withdrawals in one or more current accounts | ₹50 lakh or more in a financial year |
| Cash payment for purchase of bank drafts, pay orders or banker's cheques | For a person having PAN: ₹10 lakh or more in a financial yearFor a person not having PAN: ₹5 lakh or more in a financial year |
| Cash payment for purchase of prepaid instruments issued by banks | ₹10 lakh or more in a financial year |
| Time deposits | ₹10 lakh or more in a financial year |
| Credit card bill payment in cash | ₹1 lakh or more in a financial year |
| Credit card bill payment by any mode other than cash | ₹10 lakh or more in a financial year |
| Purchase or sale of immovable property | ₹45 lakh or more, or value adopted for stamp duty purposes, whichever is higher |
| Purchase of stamp paper | For a person having PAN: ₹2 lakh or moreFor a person not having PAN: ₹1 lakh or more |
| Investment in mutual funds (excluding transfers from one scheme to another) | ₹10 lakh or more in a financial year |
| Acquisition of shares, including through public issue | ₹10 lakh or more in a financial year |
| Purchase of bonds or debentures | ₹10 lakh or more in a financial year |
| Buy Back of shares | ₹10 lakh or more in a financial year |
| Purchase of foreign currency | For a person having PAN: ₹10 lakh or more in a financial yearFor a person not having PAN: ₹5 lakh or more in a financial year |
| Insurance Premium | For a person having PAN: ₹5 lakh or more in a financial yearFor a person not having PAN: ₹2.5 lakh or more in a financial year |
| Cash receipt for sale of goods or services (other than those separately reportable) | More than ₹2 lakh per transaction |
How does the Income Tax Department track high-value transactions?
The Income Tax Department now relies heavily on technology and data analytics to monitor tax compliance.
“Banks, financial institutions, mutual funds, registrars, property authorities, stock exchanges, payment intermediaries, and other reporting entities furnish specified financial information under various statutory reporting obligations. This information is consolidated and electronically matched with the taxpayer's PAN and other unique identifiers to build a comprehensive financial profile,” says Sandeep Bhalla, Partner, Dhruva Advisors.
During this process, the department typically cross-verifies:
- TDS/TCS credits appearing in Form 26AS and AIS with the corresponding income disclosed in the return of income.
- SFT-reported deposits, investments and other specified financial transactions with the taxpayer's declared income and the explained source of funds.
- Capital gains reported by stock brokers, depositories, mutual funds and registrars with the capital gains disclosed in the return of income.
- Purchase and sale of immovable properties with the income reported, capital gains offered to tax and the source of investment.
- Business receipts reflected through GST data, TDS returns and banking transactions with the turnover and income reported for tax purposes
How can taxpayers reduce the chances of receiving an income tax notice?
According to Vivek Vardhan, Regional Director, Anand Rathi Share and Stock Brokers, taxpayers can minimise the risk of unnecessary notices by following a few simple practices:
1. Regularly check AIS
Don't wait until you receive a notice. AIS includes SFT information and other information received by the department.
2. Reconcile AIS with your records
If something is wrong in AIS, use the available feedback mechanism where appropriate. AIS permits taxpayers to provide feedback, and the system can display reported and modified values.
3. Maintain a source-of-funds trail
For every large investment/payment, ask: "Where did this money come from?" Keep evidence for each transaction.
4. Don't mix personal and business transactions unnecessarily
If you're running a business/profession, maintain a dedicated bank account. This makes reconciliation much easier.
5. Correctly report capital gains
Maintain complete records of purchase dates, purchase prices, sale dates and sale values for investments such as shares, mutual funds, ETFs and bonds to ensure correct reporting in your ITR.
The Income Tax Department's focus today is less on how you transfer money and more on whether your financial transactions match your reported income. Keeping proper documentation, reconciling AIS with your records, and accurately reporting income are the best ways to avoid unnecessary notices, even when carrying out legitimate high-value transactions.
