Current Account Rules & Transactions to Avoid Scrutiny

Current Account Rules & Transactions to Avoid Scrutiny

Applicability of Current Accounts : Current accounts are generally used by businesses, professionals, and entities for frequent and high-value transactions & No interest is paid on balances (unlike savings accounts). Subject to stricter Income Tax and RBI compliance checks because of large inflows/outflows. Following are the basic Key Income Tax & Regulatory Rules

• Cash Deposit/Withdrawal Limits : Cash deposits above ₹10 lakh in a FY across all current accounts of an entity are reported to the Income Tax Department through SFT (Specified Financial Transactions). & Large cash withdrawals may also be monitored, especially if exceeding ₹1 crore in a FY (TDS u/s 194N @2% applicable beyond this limit).
• PAN & KYC Requirement : Mandatory PAN quoting for transactions ≥ ₹50,000 (deposit/withdrawal) & Ensure proper KYC compliance with the bank.
• GST-Linked Transactions : If you are registered under GST, payments and receipts must match GST returns (GSTR-1, 3B) to avoid mismatch notices. Frequent high-value transactions without GST filing may invite scrutiny.
• Reporting Requirements : Banks report suspicious or unusual transactions to FIU (Financial Intelligence Unit). Frequent round-tripping (large deposits & withdrawals without business rationale) can trigger inquiry.

Current Account Rules & Transactions to Avoid Income Tax Scrutiny in India

• Maintain Proper Purpose: Taxpayer must Use current accounts strictly for business/professional use & Keep personal expenses in a separate savings account.
• Know Your Transaction Limits : No fixed legal limit, but Cash deposits/withdrawals > ₹10 lakh/year may trigger scrutiny under Section 269ST.
• Maintain Clear Records : Taxpayer must Keep invoices, bills, contracts for all credits/debits & Bank statements alone are not sufficient for justification.
• Avoid Excessive Cash Transactions : Cash deposits > ₹50,000/day are flagged under Section 285BA & Prefer cheques, NEFT, RTGS for large payments.
• Maintain Consistency with Business Income : Taxpayer must Ensure transactions match turnover declared in ITR & Avoid suspiciously early or large inflows without justification.
• Issue and Receive Payments Properly : Taxpayer must Always issue invoices and receipts for incoming payments & Avoid round-tripping or self-transfers that appear suspicious.
• Regular Reconciliation : Reconcile bank statements with books monthly or quarterly.
• Know Reporting Requirements :Banks report Cash deposits > ₹10 lakh/year. Taxpayer must ensure your ITR aligns with bank flows to avoid mismatches.

Transactions to Avoid to Stay Tax-Compliant

• Cash-Heavy Transactions: Taxpayer should Avoid depositing or withdrawing large amounts of cash without proper documentation & Keep invoices, bills, or contracts ready to explain the source/use.
• Benami Transactions: Don’t use the account to park money for third parties (relatives, friends, clients) & Benami Act violations can lead to severe penalties.
• Unexplained High-Value Credits : Sudden large deposits (especially from unrelated parties) without invoices/contracts may attract scrutiny under Section 68 (unexplained cash credit).
• Splitting Transactions: Artificially splitting transactions to stay below reporting thresholds (e.g., multiple ₹9.9 lakh deposits) can still be flagged by banks.
• Mismatch with ITR & GST : Ensure turnover in the current account matches income declared in ITR and sales declared in GST. Any mismatch is a red flag.
• Cash Payments Beyond Limits: Don’t make business cash payments > ₹10,000 to a single person in a day (Sec 40A(3)) — such expenses are disallowed in income tax.

Best Practices related to Current Account Rules & Transactions:

• Route all business transactions through the current account.
• Keep proper invoice trail for every large credit or debit.
• Use digital modes (NEFT/RTGS/UPI/IMPS/cheques) instead of cash.
• Reconcile current account statements with Books of Accounts regularly.
• File accurate ITR & GST on time to ensure figures match.

In Summary Rules related to Current Account Rules & Transactions

• Cash transactions, unexplained deposits, and mismatch with tax returns are the top triggers for scrutiny.
• Always maintain proper documentation & reconciliation for current account activities.

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