RBI Issues Circular On Levying Unfair Interest Charges On Customers

The specified financial transactions reported by the various organisations/ institutions is reflected in the taxpayer’s Form 26AS.

The Covid-19 pandemic may have temporarily disrupted your abroad trips but if you do plan to visit a foreign land sooner or later, here’s something you must know about. As per the Income Tax department, while traveling abroad, cash transaction to buy US dollar or other foreign currency is permitted only up to a certain limit.

If an Indian taxpayer executes transactions beyond this limit, it will get reported to the income tax department by the money changer. It can then attract a possible income tax notice if the gap between the income tax return (ITR) of the taxpayer and the cash used for buying foreign currency is found reasonably huge.

Rules for cash transaction

“Amongst many prescribed organisations/ institutions, money changers and banks are mandated to report specified financial transactions annually in Form 61A to the Income Tax Authority, under Section 285BA of Income Tax Act, 1961. The specified financial transactions include the purchase of foreign currency of an amount aggregating to Rs 10 lakhs ( 1 million) or more during a financial year from money changers or banks or other authorised persons under foreign exchange regulations,” Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, said.

This also includes any credit of foreign currency to a foreign exchange card, expenses in foreign currency through a debit or credit card or traveller’s cheque, or any other instruments.

The rationale behind the rule

So if the cash used for buying overseas tender is not in sync with the travellers’ income tax return (ITR) for that financial year, then, in this case, the income tax department may send notice to the traveller.

The intent behind introducing such reporting mechanism is to keep an eye on the high-value transactions undertaken by the taxpayers. Therefore, where the income tax authority believes that the income reported by the taxpayer in the annual income tax return is disproportionate to the transactions reported by the money changers or Banks, a notice requesting an explanation may be sent by the income tax authority to the taxpayer.

“The specified financial transactions reported by the various organisations/ institutions are reflected in the taxpayer’s Form 26AS. Through this taxpayers can ensure that the income related to such reported transactions is duly offered to tax and disclosed in their income tax return,” Jhunjhunwala asserted.

Way ahead?

What should taxpayers do if they receive a notice from the I-T department for exceeding the set limit for cash transactions in a foreign currency?

“When the taxpayer receives a notice for any mismatch or discrepancies between the reported high-value transactions and income disclosed in the tax returns, a detailed explanation along with necessary documents should be furnished to the tax authority,” Jhunjhunwala explained.

The submissions made in respect of the reported high-value transactions should explain the source of income, taxes paid on such income and disclosures made in the tax return.

It’s better to adhere to the prescribed norms rather than settling for an unwanted I-T notice followed by a series of explanations to justify your actions.