It is important to understand the rules governing savings accounts for everyone, especially those who want to properly and efficiently manage their financial deals without unnecessary complications especially by the Income Tax Department. Many people are also clueless about the proper set of rules in dealing with deposits, which oftentimes results in tax notice and fines. Knowing them well and following the guidelines will keep those hassles away and bring smoothening transactions.
Why It’s Important to Know Savings Account Rules
A savings account is designed to help people save money securely and also earn interest over time. However, there are rules on deposits, interest, and cash transactions that if not heeded, would attract unwanted tax scrutiny. In fact, some breaches of such rules could mean a tax notice, thereby attracting penalty or even prosecution. All these can be avoided if the rules on deposits, interest, and cash transactions in a savings account are complied with.
Deposit Limits in a Savings Account
Yearly Limitation
The deposit limit per year is an important rule that you should learn. Your savings account interest will allow you to deposit up to ₹10 lakh in India for a full financial year, which means from April 1 to March 31. Though this seems to be a very large amount, it should be kept in mind that the excess amount from this may create ruckuses in the Income Tax Department.
Above ₹ 10 Lacs deposited in a financial year has to be very closely seen. All large transactions ordinarily have a reference either to income escaped meant to be reporting or income that has slipped. The scrutiny is done to find out whether the money deposited is from all proper sources.
Cumulative Limit
Another important rule that should be observed by a person is cash deposits. If a person makes a deposit of Rs. 50,000 or more on the same day, he/she will have to go to the bank with a PAN card. This is a complete way to prevent money laundering and trace large amounts of cash deposited into an account.
If you don’t have a PAN card, you will need to submit either Form 60 or Form 61, which are alternative forms for those who do not hold a PAN. Failing to comply with the rule may lead to a reporting by the bank and subsequently may put you at risk of receiving a tax notice.
Daily Cash Deposit Rule
Another important rule that a person should adhere to is related to cash deposit. If one makes ₹50,000 or above in cash deposit within one day, the person would be required to produce PAN card to the bank because this rule prevents money laundering and ensures large sums of cash deposited into an account are traced.
If you do not have a PAN card, you will need to submit either Form 60 or Form 61, which are alternate forms for people who don’t have a PAN. If you fail to follow this rule, it could result in the bank filing a report, and subsequently, you may be exposed to a tax notice.
High-Value Deposits and Taxation
Interest on Deposits
Tax implication is levied on interest earnings from a savings deposit of more than ₹10,000 during a financial year. This applies to interest earned from all savings deposits held by you. For example, you may have earned an interest amount of ₹8,000 in one savings account while receiving ₹5,000 in another. Adding both interests will result in a total income of ₹13,000, which becomes taxable as per applicable income tax slabs.
However, there is a benefit for senior citizens. Under Section 80TTB of Income Tax Act, tax exemption stands for senior citizens for interest income up to ₹50,000 in a financial year. This comes as a great relief, especially to those depending on this source of income.
Tax Exemption for Interest
You have been trained on data up to October of 2023. If the total interest earned through savings accounts for an entire financial year is less than Rs 10,000, then the taxes are waived. A savings account under Section 80TTA, Income Tax Act provides you tax exemption up to 10,000 based on earning through interest income. This means you will now have to consider the general interest accrued from all your savings accounts.
It is important to calculate correctly all the interest earned in the course of one year so as not to miss the tax exemptions available under the law.
Result of Exceeding Deposit Limit
Reporting to the Income Tax Department
Deposits that exceed ₹10 lakh during an entire financial year fall under the classification of high-value transactions and thus have to be reported by banks to the Income Tax Department. Such reports are verified by the Income Tax Department to establish the legitimacy of the source of funds and whether any individual fails to comply with tax regulations.
If your deposits exceed a limit, then the bank would naturally report to the tax department, and you may face an audit. This may lead the Income Tax Department to analyze your account and could issue a tax notice if they deem the deposits undeclared.
Tax Notice
Additionally, if your account is noted for suspicious activity or if you have exceeded the deposit limits, then definitely you will get a tax notice from the Income Tax Department. Usually, there is an explanation required on the sources from which the funds came and asked to submit evidence, like bank statements, investment records, or inheritance certificates, to substantiate the sources.
The absence of a response to a tax notice may lead to penalties or an action taken by law against him. Maintaining accurate records showing the details of all deposits and transactions is normally important because your money in a savings account can easily be justified when required.
What If You Receive a Tax Notice
Evidence
On the other hand, if you do receive a tax notice, be sure to respond quickly. Make sure to submit all the required documents proving the source of the funds. Examples may include:
- Bank statements showing the source of funds
- Investment documents proving the source of income
- Inheritance certificates, if the money was inherited
- Proof of loan repayments or other legitimate sources
The more evidence you provide to support your claims, the easier it will be to resolve the issue without facing penalties.
Seek the advice of a Tax Expert
In case you are not sure how to respond to a tax notice or if the matter is complex, you should consider seeking advice from a qualified tax professional or financial consultant. A professional can assist you in navigating the tax law, answer the notice appropriately, and keep you abreast of all regulations.
Cash Transaction Restrictions
Under Section 269ST of the Income Tax Act, it is forbidden to make a transaction worth more than ₹2 lakh in cash with one individual in a day. It is an effort to curtail the use of cash for large transactions that may be hard to trace and may be related to some tax evasion or other illegal activities.
If you break this rule, you may be fined, which can be pretty costly. You should thus be aware of these prohibitions and ensure that you do not breach them as you conduct large cash deals.
Braj Verma is a resident of Rajgarh in Madhya Pradesh and is a content writer and freelancer by profession. He has a degree in Political Science from Barkatullah University, Bhopal. He has expertise in subjects like credit cards, banking, loan, insurance, political analysis and digital marketing.