Avoid Income Tax Notice: You might think that if you file your income tax on time, why would you still get a notice from the department? But it’s not like that. There are many transactions closely monitored by the Income Tax Department, and they may send you a notice.
The information in this post has been collected from various sources, including a document uploaded on the Income Tax website and several other pieces of data gathered solely for this post.
Table of Contents
Four Key Questions Covered In this post, I will answer four questions:
- Maximum Cash Transactions to avoid income tax notice.
- Maximum UPI Transactions to avoid income tax notice.
- Maximum FD Limits to avoid income tax notice.
- Maximum Credit Card Limit to avoid income tax notice.
Cash Transaction Limits to Avoid Notices
As you know, the Indian government has been actively discouraging the use of cash over the last 8–10 years. That’s why cash transactions are heavily monitored.
There are two types of cash transactions:
- In Current Account
Savings Account: Transaction Type Annual Limit
| Cash Deposit | ₹10 Lakhs |
| Cash Withdrawal | ₹10 Lakhs |
You can exceed ₹10 Lakhs, but you must have proper proof. If not, you will receive a notice and face penalties.
If your transaction is genuine and has proper documentation, you may still be subject to TDS (Tax Deducted at Source) based on whether you file your ITR on time.
TDS on Cash Withdrawals
If ITR is filed on time:
- Withdraw ₹1.1 Cr in a year → 2% TDS on ₹10 Lakhs above ₹1 Cr = ₹20,000
If ITR is not filed on time:
- On ₹80 Lakhs (₹20 Lakhs – ₹1 Cr): 2% TDS = ₹1.6 Lakhs
- On amount above ₹1 Cr (₹10 Lakhs): 5% TDS = ₹50,000
Total TDS = ₹2.1 Lakhs
Even if you keep transactions under ₹10 Lakhs, there are additional restrictions.
Additional Cash Restrictions
Type of Restriction Limit
| Single cash transaction | Max ₹2 Lakhs |
| Real estate cash transaction | Max ₹20,000 |
Current Account
| Account Type | Annual Cash Transaction Limit |
| Current Account | ₹50 Lakhs |
If you withdraw or deposit more than ₹10,000 cash per day, that expense cannot be deducted from taxable income. This increases your taxable profit and hence your tax liability.
Note: These limits apply only to cash transactions. There is no such restriction on non-cash transactions. Your savings/current account can have any balance – ₹2 Cr, ₹5 Cr, ₹10 Cr – it doesn’t matter.
UPI Transaction Rules You Must Follow
If your annual UPI transactions are under ₹50,000, there is nothing to worry about.
- The ₹50,000 limit includes both debit and credit.
- Refunds (money returned through UPI) do not count toward this limit.
If your UPI transactions exceed 500 in a year (even in value or count), your ITR must reflect corresponding income.
If Not:
- Mismatch between UPI volume and ITR → Possible Notice
- Cashback & Rewards:
If you earn more than ₹500 through UPI cashback/rewards in a year, it is treated as income from other sources and taxable.
Same applies to e-wallet rewards under Section 56(2) of the Income Tax Act.
GST Implications
If your UPI transaction volume exceeds ₹20 Lakhs/year, then:
- You are mandated to register for GST
- Government treats this as business turnover
- You will need to file and pay GST
This applies even if the intent was just to earn 1–2% cashback, and it can trap you in serious compliance issues.
Advice for Small Businesses
If you’re a small business owner:
- Shift all transactions from Savings Account to Current Account
- Because in Savings, daily cash transaction above ₹10,000 can trigger IT scrutiny
- In Current Account, there’s no such limit; only requirement is that ITR matches your transaction volume
FD Limits That Can Trigger a Notice
| FD Cumulative Total (Annual) | Action Taken |
| Over ₹10 Lakhs | Bank will report to IT Department |
Even here, as long as your FDs match your savings (Income – Expenses), no problem. If notice comes and you can justify it, again – no issue.
Credit Card Spending That Raises Red Flags
If your Credit Card spends exceed ₹10 Lakhs/year, your account will be flagged.
Then:
- Income Tax Dept will check Form 26AS.
- They will match your income with: Your credit card expenses and All other expenses
3 Scenarios That Almost Guarantee a Income Tax Notice
- Income much less than expenses: Suppose Your Income is ₹6–7 Lakhs and Expenses are ₹25 Lakhs, Almost certain to receive a notice.
- Income more than expenses: Income: ₹50 Lakhs, Expenses: ₹20 Lakhs (₹10 Lakhs via Credit Card), Department may ask for expense proof, but if genuine, no problem.
- No Income but High Card Use / Rotation: Paying one card bill with another, Frequent UPI use for rewards, High risk of Income Tax + GST notices.
Advisable: Hire a good CA or even a lawyer if you’re in such cases to avoice income tax notice.
Conclusion
Cash transaction limits are tightly monitored. UPI rewards > ₹500/year are taxable. UPI volume > ₹20 Lakhs/year may trigger GST requirements. FDs & Credit Card expenses must match your declared income. Mismatch = Notice + Penalty (50–60% of income) possible. Be careful. Stay compliant. Keep records to avoice income tax notice. File accurate ITR.
