How Does the Income Tax Department Tracks Your Financial Transactions?

To monitor tax evasion, the Income Tax Department has come up with new methods that will help in tracking the undeclared income of individuals. Individuals who make frequent high-value transactions have to intimate the Income Tax Department.

Otherwise, the respective department will track these transactions and send notice to the concerned individual or taxpayer.

Wondering how Income Tax Department tracks your financial transactions?

Let’s find out!

How Does the Income Tax Department Trace Financial Transactions?

Currently, individuals have to quote PAN in case of every high-value transaction. On the basis of the provided data, the IT department can track financial transactions. Alternatively, the IT department can get information from other major sources, which include financial institutions or property registrars.

When individuals make a high-value transaction through a bank, insurer, credit card company, or mutual fund company, these institutions provide the Income Department with information about the same.

After that, the Income Tax Department tallies the provided information with the return filed by an individual. The IT department primarily compares overall income with the total income and investment declared by the individual and calculates the tax liability. Through this calculation, the IT Department can easily find out the evasion (if any).

Now that you have gained a basic idea about how Income Tax Department traces your financial transactions, let’s learn about some transactions that the IT Department tracks.

Which Financial Transactions Are Tracked by the Income Tax Department?

tax image — (source: economictimes.indiatimes )

To check black money cases and track high-value transactions, the Income Tax Department implemented new guidelines, which came into effect from November 2016, March 2017, and August 2020. According to these guidelines, all goods and services providers must report a high-value transaction to the Income Tax Department.

Further, the new guideline requires intimation to the tax authorities mutual funds, immovable property, term deposits regarding cash receipts, purchase of shares, sale of foreign currency via Form 61A.

Read on to know about the transactions tracked by the Income Tax Department.

1. Purchase/Sale Immovable Property

The Income Tax Department can track any purchase or sale of immovable property worth ₹ 30 lakhs or more. Here, the property registrar has to report regarding the transaction of such value. On the other hand, individuals purchasing or selling property must declare this on Form 26AS. The IT Department will scrutinise whether individuals (buyer/seller) have reported this transaction or not.

2. Purchase/Sale of Goods and Services

On the sale of goods and services of more than ₹ 2 lakhs, professionals have to intimate the Income Tax Department. TCS (Tax Collected at Source) will be imposed for purchasing or selling of any goods and services worth ₹ 2 lakhs and more in cash.

3. Term Deposit in Bank

The department of Income Tax traces bank transactions, particularly Time deposits of ₹ 10 lakhs or more in a financial year. Banks feed this transaction-related information to the Income Tax authorities through which the department tallies the return file report. New guidelines are applicable to deposits and withdrawal from Post Office accounts too.

4. Current Accounts Deposit

Another type of high-value transaction that can push individuals under the Income Tax radar include Current Account deposits or withdrawals of ₹ 50 lakhs or more in a financial year. Here, financial institutions must report such high-value transactions to the IT Department.

5. Invest in Mutual Funds, Stocks, Bonds, or Debentures

The Income Tax Department tracks transactions related to investment in a mutual fund, stocks, bonds or debentures that exceeds ₹ 10 lakhs in a financial year. The Income Tax Department has prepared an Annual Information (AIR) statement that helps in tracking high-value transactions. Here, the concerned authorities accumulate information of high-value transactions in a financial year based on AIR. If individuals have made a transaction of such an amount, they can check the same in the AIR section of Form 26AS. Part E of this form features information related to high-value transactions.

6. Cash Deposits in Bank

The Income Tax Department tracks bank transactions if individuals deposit ₹ 10 lakh or more in a financial year. Deposit of such high-value amounts in one or more accounts other than Current Account and Time Deposit of individuals particularly concerns the authority.

7. Credit Card Bill Payments

CBDT (Central Board Of Direct Taxes) mandates intimation of a cash payment of ₹ 1 lakh or more against a credit card per annum. The concerned institution also reports payment of ₹ 10 lakhs or more in a financial year to the department regarding the settlement of credit card bills. Here, individuals must be cautious of the spending limit of credit cards as the IT Department can trace transactions of credit card details.

8. Sale of Foreign Currency

If individuals receive an amount of ₹ 10 lakhs or more (in a financial year) for selling a foreign currency or for any credit in that currency, it may attract the attention of the IT department. Here, transactions made through insurance of traveller’s cheque, drafts, credit or debit card or any other instrument demands intimation to Income Tax Department.

Annual Information Return (currently known as Statement of Financial Transactions) features PAN of an individual making a transaction. As a result, details of all transactions of individuals are accessible to the Income Tax Department. That’s why individuals must report transactions of a specified amount (such as ₹ 10 lakhs, ₹ 50 lakhs or more).

This declaration will help you eliminate chances of getting notice or enquiries from the Income Tax Department. Hence, with such elaborate discussion, if you are searching for how the Income Tax Department tracks your financial transactions, you must have got their answers.

Frequently Asked Questions

✓ Which report contains information about Specified Financial Transactions?

Form 26AS contains information about Specified Financial Transactions, i.e. sold or purchased stocks, information related to credit card bill payment, real estate transactions.

✓ When can the Income Tax Department issue non-PAN transactions related notice?

The Income Tax Department can issue non-PAN transactions if they find any mismatch between actual high-value transactions and data submitted while filling in return or missing PAN details in relevant space.