What do I do with my Rs. 500/- and Rs. 1000/- notes now that they’ve ceased to be legal tender? Are they worthless now?
No, these notes still have value. You can stop taking photos of them as wrappers of peanuts to circulate on Whatsapp. There are two things you can do with the notes you have on hand – deposit them in your bank account or exchange them for notes of other denomination. There is no limit for the old notes to be deposited in your bank account, and the money will get credited in your account immediately.
Also, you can get these high denomination notes exchanged for notes of other denomination at any bank or post office where you don't have an account, provided you produce any identity card issued by the government. There is, however, a limit for getting old notes exchanged. It is Rs. 4,000. And now that the ATMs are open, you can withdraw a maximum of Rs. 2,000.
But Rs. 4,000/- is simply not enough for me!
If you’re in need of more money even after getting Rs. 4,000 in exchange, you can withdraw from your account the existing balance, or load the defunct notes into the account and make withdrawals in denominations of Rs. 100, Rs. 50, Rs. 20 and Rs. 10. The limit for a withdrawal a day is Rs. 10,000. It is capped at Rs. 20,000 a week. As the daily limit varies between banks, it is better to ask your banker and act accordingly.
How much time do I have to exchange my money?
You have till December 30 to exchange the high denomination currency, or deposit them in your bank accounts. If you are in possession of these notes after December 30, you have till March 31 to file a declaration with the RBI to get them exchanged. After that, they’re as good as paper.
I’m not sure I want to deposit my money – apparently, there’s a penalty of 200% on deposits!
No, there’s not. There’s no limit or penalty on the amount of money you deposit in your account right now.
But the Revenue Secretary said so! Our deposits are going to be tracked!
Brevity may be the soul of wit, but unfortunately, not of The Income Tax Act, 1961. The Revenue Secretary has said (rather, tweeted) four very important statements, which are to be analysed before arriving at any conclusions. The first statement is as follows.
1 . "We would be getting reports of all cash deposited during 10th Nov to 30th Dec.2016 above threshold of Rs.2.5 lac in each A/C."
Now, the first tweet talks about a Rs. 2.5 Lakh threshold. This is not an arbitrary number. It is the maximum exemption limit for income tax for individuals. Basically, you are not liable to pay the tax if your annual earnings are below Rs. 2.5 Lakhs. So if you’re a non-earning member who has saved money, you can deposit your savings of up to Rs.2.5 lakhs without wondering if you’ll be pulled up by the tax authorities for having money in your account, out of the blue. If you’re a senior citizen over the age of 60, the limit goes up to Rs. 3 Lakhs, and if you’re a super senior citizen over the age of 80, 5 Lakhs.
Next, he talks about ‘getting reports’. The fact is that the government and Revenue Department had been keeping track of high value cash deposits for a few years now. If you have seen your tax credit statement, the 26 AS, there is a section called "Annual Information Return", where banks are mandatorily required to furnish information about high value transactions that are linked with your PAN. So keeping track of your cash deposits (especially high value deposits) is not something novel that the government is going to do now that the demonetisation has been announced.
But what about the tweets where he talks about income tax action and 200% penalty?
This is what his other three tweets said:
2.>"Income Tax department would do matching of this with income returns filled by the depositors. And suitable action may follow."
3.>"If cash amount of above Rs10 lac is deposited in a bank a/c not matching with declared income, same will be treated as tax evasion"
4. >"In such case,tax amount plus a penalty of 200% of the tax payable would be levied as per Section 270(A) of the income tax Act"
We are in November 2016, which forms part of the Financial Year 2016-17. You are required to file your Income Tax Returns for this financial year by 31st July 2017 (the regular due date) to declare your income, or you can take time up to March 2019 to file it under the belated provisions (although you lose the benefit of being able to revise your return).
First, keep in mind that the income tax authorities have access to your 26AS, where there are details of both the income earned (on which tax has been deducted at source), as well as high value transactions that were reported in the AIR.
If you report or declare your ‘large’ deposit of cash in your account along with the income you have normally earned during the year, and pay tax on both your income as well as the deposit, then you will see no further consequences.
If, on the other hand, if you don’t declare the deposit, there is a chance that your return of income will be picked up for scrutiny by the Income Tax authorities, wherein they will question the source of your deposit, and ask for an explanation.
If you are able to substantiate a legitimate source, and the authorities are satisfied with your explanation, then you don’t face a penalty.
If, however, the case is such that you have intentionally suppressed facts, recorded false entries in books, or that you aren’t able to substantiate evidence, then the authority will pass an order stating that you have misreported your income for the year, and you will be liable to pay a penalty of 200% tax on misreported income. Note that it isn’t 200% of the income itself, but on the tax component.
Also note that in order for penalty to rise, three conditions have to be fulfilled. First, you should have omitted the deposit from the declaration of income in your income tax return. Second, your return should have been pulled up for scrutiny. Third, upon given the chance to explain the source of said omitted deposit, you are unable to substantiate evidence to prove its legitimacy. Unless all three are fulfilled, penalty does not arise.
Ok, help me understand with an example - If I have one crore of cash to deposit, what is the penalty I should pay?
If you deposit the one crore in your bank account, show it in your income tax return for the FY 2016-17, and pay tax on your income at the maximum marginal rate (assuming that you are not claiming it as business income, where you are given the benefit of claiming expenditure), you are NOT liable for any penalty, because it is not misreported income. The tax authorities will see that you have declared it and paid tax on it, thus making the deposit a legitimate credit.
If, on the other hand, you deposit this one crore in your bank account, omit it from your declaration of income (and therefore not pay any tax on it), and your return gets picked up for scrutiny, you will be given an opportunity by the authorities to explain the source. If you are unable to substantiate and prove that the cash you deposited is a fruit of money that you’ve earned legally and paid tax on, it will be considered misreported income, and you’ll be required to pay 200% tax on this misreported income as penalty.
If they’re legitimately earned cash deposits whose source you can explain – no penalty.
If you intend on showing it in your income tax return, including it in your income earned during the year, and pay tax on it – no penalty
If it’s a deposit that you’ve not declared/omitted from your return, not paid tax on, and aren’t able to prove as legitimate if and when your return of income is picked up for scrutiny – penalty.
Any other advice?
Try your best to exchange and withdraw minimally, ensuring that people from lower income groups who survive entirely on cash aren’t sent back on account of lack of funds. Use mobile wallet services, debit and credit cards instead.
Wherever possible, give underprivileged people you know, change for their Rs. 500/- and Rs. 1000/- notes when they ask for it during these few weeks. You could also guide them on how they can get their money exchanged, or exchange it on their behalf.
The most important piece of advice I can give you, is this – If you have a considerable amount of cash to be deposited, or know someone who does, or are generally looking for comprehensive information and customized advice relating to the demonetization scheme, hire a Chartered Accountant to help you with the process, instead of looking to twitter and social media to clear your doubts. Seriously.