Cash Deposits and Income Tax Scrutiny: SFT Thresholds

Key Takeaways

• Banks must report aggregate cash deposits of Rs 10 lakh or more (savings accounts) and Rs 50 lakh or more (current accounts) to the income tax department every year under Rule 114E (Statement of Financial Transactions).
• These transactions appear in your Annual Information Statement (AIS). If the amounts do not match your filed ITR, the CASS system may flag your return for scrutiny.
• No person can receive Rs 2 lakh or more in cash in a single transaction, on a single day, or for a single event (Section 269ST). The receiver faces a 100% penalty under Section 271DA.
• If you cannot explain the source of a cash deposit, the income tax department can treat it as unexplained income under Sections 102-104 (Income Tax Act 2025), taxed at 60% plus surcharge and cess (approximately 78% effective rate) for amounts detected during scrutiny.
• Keep bank statements, sale deeds, gift deeds, loan sanction letters, and agricultural income records ready to explain any large cash deposit within 15 days of receiving a notice.

When do cash deposits trigger an income tax notice? Banks report cash deposits exceeding Rs 10 lakh per year (savings accounts) or Rs 50 lakh per year (current accounts) to the income tax department through the Statement of Financial Transactions (SFT) under Rule 114E read with Section 285BA. These entries appear in your Annual Information Statement (AIS). If the deposit amount does not match the income you reported in your ITR, the Centralized Processing Centre may issue a Section 143(1) intimation or select your return for Section 143(2) scrutiny assessment.

Cash deposits are a normal part of business. Retailers collect payments in cash, landlords receive rent, farmers deposit proceeds after harvest. The income tax department does not tax the deposit itself. What it looks at is whether you reported enough income to justify the deposit. When the numbers do not match, the department asks questions.

This guide explains what triggers reporting, how the data reaches the department, what thresholds apply, and what to do if you receive a notice about cash deposits.

What the Bank Reports: SFT Thresholds Under Rule 114E

Under Rule 114E of the Income Tax Rules (read with Section 285BA of the Income Tax Act), banks and other financial institutions must file a Statement of Financial Transactions (SFT) in Form 61A for transactions above specified thresholds. This statement is filed annually by May 31 following the financial year.

The table below lists the key SFT reporting thresholds relevant to cash deposits:

These thresholds are aggregate. Deposits across multiple branches or accounts of the same bank linked to one PAN are added together. Depositing Rs 5 lakh across two savings accounts in the same bank still totals Rs 10 lakh if the combined deposits cross the threshold.

(Rule 114E, Income Tax Rules, 1962; Section 285BA, Income Tax Act)

How Cash Deposit Data Reaches the Income Tax Department

The reporting chain works in four steps:

Step 1: Bank files SFT. The bank submits Form 61A to the income tax department by May 31 each year, listing every account holder whose transactions crossed the thresholds.

Step 2: Data appears in AIS. The income tax department consolidates SFT data from banks, registrars, mutual fund houses, brokers, and other reporting entities into your Annual Information Statement (AIS). You can view your AIS by logging into the income tax e-filing portal and navigating to AIS under the "Services" tab.

Step 3: CASS compares AIS with ITR. The Computer Assisted Scrutiny Selection (CASS) system automatically compares the income and transactions reported in your ITR against the data in your AIS. If there is a mismatch, for example, Rs 15 lakh in cash deposits but only Rs 6 lakh total income reported, the system flags it.

Step 4: Department issues notice. Depending on the mismatch, you may receive a Section 143(1) intimation (if the CPC detects a clear discrepancy), a Section 142(1) notice requesting information, or a Section 143(2) scrutiny notice for a detailed examination.

Section 269ST: The Rs 2 Lakh Cash Receipt Limit

Independent of SFT reporting, Section 269ST of the Income Tax Act prohibits any person from receiving Rs 2 lakh or more in cash:

• In a single transaction, or
• In aggregate from one person on a single day, or
• In aggregate from one person in respect of a single event or occasion

This restriction applies from April 1, 2017. The penalty is equal to 100% of the cash received (Section 271DA), and it is imposed on the receiver, not the person making the payment.

Who is exempt: Government entities, banking companies, post office savings banks, cooperative banks, and transactions covered under Section 269SS (loans and deposits).

Practical example: A jeweller sells gold jewellery worth Rs 3 lakh to a customer who pays the entire amount in cash. The jeweller faces a penalty of Rs 3 lakh under Section 271DA because the cash receipt exceeds Rs 2 lakh. The correct approach is to accept only up to Rs 1,99,999 in cash and collect the balance through bank transfer, cheque, or UPI.

What Happens If You Cannot Explain the Source

When the Assessing Officer asks about a large cash deposit and you cannot provide a satisfactory explanation with documentation, the department can invoke the following provisions:

Unexplained cash credits (Section 68, ITA 1961 / Section 102, ITA 2025): If any sum is found credited in the books of account of an assessee and the assessee offers no explanation about the nature and source, or the explanation is not satisfactory, the sum may be treated as the assessee's income for that year.

Unexplained money (Section 69A, ITA 1961 / Section 104, ITA 2025): If the assessee is found to be the owner of any money, bullion, jewellery, or other valuable article not recorded in the books of account, and offers no satisfactory explanation about the nature and source of acquisition, the value may be deemed income.

Tax Rate on Unexplained Income

The tax treatment depends on when the income relates and whether you disclosed it voluntarily:

For income up to AY 2025-26 (ITA 1961, Section 115BBE):

In addition, Section 271AAC allows the Assessing Officer to levy a penalty of 10% of the tax payable under Section 115BBE. This penalty does not apply if you disclosed the income in your return and paid the tax before the end of the financial year.

For Tax Year 2026-27 onwards (ITA 2025, Section 195, as amended by Finance Act 2026):

If you voluntarily disclose the unexplained income in your original return, the base tax rate is 30% (approximately 39% effective rate after surcharge and cess). If the income is detected by the department during scrutiny, stronger penalty provisions apply. The Finance Act 2026 amendment distinguishes between voluntary disclosure and detection, incentivising taxpayers to come clean in their original returns.

How to Explain Cash Deposits: Documentation You Need

If you receive a notice about cash deposits, the Assessing Officer needs to see that the cash has a legitimate, tax-paid source. Here is what to keep ready for common scenarios:

Business cash receipts (retailers, traders):

• Sales register, cash book, and bank book for the period
• GST returns (GSTR-3B, GSTR-1) showing corresponding turnover
• Invoices or bills for cash sales above Rs 200

Withdrawal and redeposit (cash withdrawn from one account, deposited in another):

• Bank statements of both accounts showing the withdrawal and deposit dates
• Passbook entries matching the amounts

Sale of property or assets:

• Registered sale deed showing the transaction value
• Proof that capital gains tax was paid or exemption claimed (Section 54/54F)
• Buyer's bank statement or cancelled cheque if the buyer paid in cash (note: cash receipt above Rs 2 lakh violates Section 269ST)

Gift from a relative:

• Gift deed on stamp paper signed by both parties
• Relationship proof (Aadhaar, ration card, birth certificate establishing the relationship)
• Source of funds in the donor's hands (the department may ask how the donor had the cash)
• Note: gifts from relatives as defined under Section 56(2)(x) are exempt regardless of amount

Agricultural income:

• Land ownership records (7/12 extract, patta, khata)
• Crop sale receipts or mandi records
• Agricultural income reported in the ITR (Schedule EI)
• Village records showing the land is used for agriculture

Loan proceeds:

• Loan sanction letter from bank or NBFC
• Loan disbursement statement
• Repayment schedule

Common Mistakes That Trigger Scrutiny

1. Not filing an ITR when deposits cross Rs 10 lakh. If the bank reports Rs 12 lakh in cash deposits and you did not file any ITR, the department has no return to match. This almost always triggers a notice.

2. Reporting income far below the cash deposited. Filing an ITR with Rs 4 lakh income but depositing Rs 15 lakh in cash creates a visible mismatch in the CASS system.

3. Ignoring the AIS before filing. Always check your AIS on the e-filing portal before filing your ITR. If a transaction is wrong (for example, a joint account deposit attributed fully to you), submit feedback through the AIS portal to correct it. Do not wait for a notice.

4. Splitting deposits to stay below Rs 10 lakh. Depositing Rs 9.9 lakh each in multiple accounts at different banks does not avoid detection. Banks report on a per-PAN basis, and the income tax department aggregates across all accounts linked to your PAN. Structuring deposits to avoid reporting thresholds can draw more attention, not less.

5. Accepting large cash payments for goods or services. Receiving Rs 2 lakh or more in cash per transaction violates Section 269ST regardless of whether you report it. Use digital payments or bank transfers for amounts above Rs 1,99,999.

How Tax Garden Helps

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