Income Tax Department Tightens Surveillance on High-Value Transactions with New Filing and TDS Norms

The Income Tax Department is stepping up its efforts to detect individuals who spend heavily but may be underreporting their income. With the help of advanced data analytics and deeper integration with financial institutions, authorities are now closely observing high-value financial activities to crack down on tax evasion.

What Triggers Income Tax Department’s Attention?

Definition of High-Value Transactions

As per the new norms, the following are flagged as high-value transactions:

• Deposits/Withdrawals over ₹50 lakh in a current account

• Property purchases/sales worth over ₹30 lakh

• Credit card payments exceeding ₹10 lakh annually (including non-cash payments)

• Foreign exchange transactions or mutual fund/bond investments above ₹10 lakh

Any such activity must be reported annually by banks, co-operative societies, fintech firms, mutual funds, and post offices through the Statement of Financial Transactions (SFT), due by May 31 every year.

New ITR Filing Rules for Specific High Spenders

Even if an individual’s total income is below ₹2.5 lakh—the basic exemption limit—they are now required to file an income tax return if they meet any of the following conditions:

Mandatory ITR Filing Conditions

• Deposited ₹1 crore or more in a bank account

• Spent over ₹2 lakh on a foreign trip

• Paid more than ₹1 lakh in annual electricity bills

Higher TDS on Large Cash Withdrawals

The Income Tax Department has enforced tax deduction at source (TDS) for cash withdrawals exceeding specific limits:

• Withdrawals over ₹1 crore: 2% TDS

• For habitual non-filers: TDS rises to 5%

• In some cases, even withdrawals above ₹20 lakh may attract 2% TDS for non-filers

These measures aim to plug tax leaks and ensure income declarations match spending patterns.

About  Income Tax Department

The Income Tax Department (ITD) is a crucial government agency in India, responsible for the administration and collection of direct taxes, primarily income tax. It operates under the Department of Revenue, Ministry of Finance, Government of India.

History of Income Tax in India

The concept of taxation has existed in various forms throughout Indian history (e.g., Kautilya's Arthashastra mentions revenue collection). However, the modern income tax system in India traces its origins to the British colonial period.

• First Income Tax Act (1860): The first Income Tax Act was introduced in February 1860 by James Wilson, who was British-India's first finance minister. This was a direct consequence of the losses incurred by the British government during the Rebellion of 1857. It came into effect on July 24, 1860.

• Subsequent Acts: The 1860 Act was revised and replaced multiple times, notably in 1886, 1918, and 1922. The Income Tax Act of 1922 was particularly significant as it led to the establishment of an operational Income Tax Department, distinguishing various departments of income tax authorities.

• The Income-tax Act, 1961: After India gained independence, the need for a comprehensive and modern tax law became apparent. The Income-tax Act, 1961, which is still the primary legislation governing income tax in India, was enacted and came into force on April 1, 1962. This Act has been subject to numerous amendments and refinements through annual Union Budgets and other legislative changes.

• Central Board of Direct Taxes (CBDT) (1963): The Central Board of Direct Taxes (CBDT) was formally constituted in 1963 under the Central Board of Revenue Act, 1963. It was formed by bifurcating the Central Board of Revenue into two boards: one for direct taxes (CBDT) and one for indirect taxes (now CBIC - Central Board of Indirect Taxes and Customs). The CBDT is the apex body responsible for administering direct tax laws and providing policy inputs to the government.

Structure and Governance

The Income Tax Department is governed by the Central Board of Direct Taxes (CBDT).

• Central Board of Direct Taxes (CBDT): The CBDT is a statutory authority headed by a Chairman and comprises six members, all of whom are ex-officio Special Secretaries to the Government of India. These officials are selected from the Indian Revenue Service (IRS), forming the top management of the Income Tax Department. The CBDT provides inputs for policy and planning of direct taxes and is responsible for the administration of direct tax laws through the IT Department.

• Hierarchy: Below the CBDT, the Income Tax Department has a hierarchical structure with various ranks of officers, primarily from the Indian Revenue Service (IRS), who manage regional headquarters and local offices across India. These officers handle tax assessments, audits, investigations, and taxpayer services.

Functions and Responsibilities

The primary functions and responsibilities of the Income Tax Department include:

1. Tax Collection and Administration: Ensuring efficient collection, processing, and management of direct taxes (e.g., Income Tax, Corporate Tax, Wealth Tax - though Wealth Tax has been abolished). This involves assessing tax returns and identifying tax liabilities.

2. Enforcement of Tax Laws: Enforcing various direct tax laws, most importantly the Income-tax Act, 1961, as well as others like the Benami Transactions (Prohibition) Act, 1988, and the Black Money Act, 2015. It aims to prevent tax evasion and avoidance.

3. Policy Formulation: Providing inputs and advising the government on matters related to direct taxation and its impact on the economy, contributing to the formulation of progressive tax policies.

4. Taxpayer Services: Providing various services to taxpayers to facilitate easier compliance, including:

   • Processing of Income Tax Returns (ITRs) efficiently, often through the Centralized Processing Center (CPC) in Bengaluru.

   • Processing tax refunds to taxpayers.

   • Providing assistance and clarifying tax laws and filing procedures.

   • Addressing and resolving taxpayer grievances.

   • Promoting e-filing of income tax returns.

5. Compliance and Investigation:

   • Conducting audits, investigations, and raids to uncover tax evasion and undisclosed income.

   • Imposing penalties for non-compliance and prosecuting cases of tax evasion.

   • Monitoring high-value transactions to ensure accurate income declaration.

6. Dispute Resolution: Offering mechanisms for the resolution of disputes related to tax assessments, such as the Dispute Resolution Committee (DRC).

7. Education and Awareness: Educating taxpayers about their rights, responsibilities, and tax laws through various programs and materials.

Recent Initiatives and Digital Transformation

The Income Tax Department has undergone significant digital transformation in recent years to enhance efficiency, transparency, and taxpayer convenience:

• e-Filing and Centralized Processing Center (CPC): The widespread adoption of e-filing and the efficient functioning of the CPC in Bengaluru have streamlined the processing of tax returns and refunds.

• Faceless Assessment and Appeals: The introduction of faceless assessment and appeals aims to reduce direct interaction between taxpayers and tax authorities, thereby minimizing corruption and increasing transparency.

• Annual Information Statement (AIS) and Taxpayer Information Summary (TIS): These comprehensive statements provide taxpayers with a consolidated view of their financial transactions, helping them accurately file their returns and promoting voluntary compliance.

• Pre-filled ITRs: The department provides pre-filled Income Tax Returns, drawing data from various sources (like salary, interest, TDS) to simplify the filing process and reduce errors.

• Aadhaar-PAN Linking: Mandatory linking of Aadhaar with PAN for streamlined verification and tracking of financial transactions.

• Data Analytics and AI: The ITD is increasingly leveraging data analytics and artificial intelligence to identify potential tax evasion, mismatches in income and transactions, and high-risk cases for scrutiny.

• Electronic Campaign to Address Mismatches: Recent initiatives, such as the electronic campaign launched by CBDT in December 2024, aim to assist taxpayers in resolving mismatches between reported income/transactions in AIS and their ITRs.

• Monitoring High-Value Transactions: The department has intensified its monitoring of high-value transactions (e.g., large cash deposits/withdrawals, property deals, significant credit card payments) and imposed new TDS rules to ensure better compliance.

• Updated Return (ITR-U): Section 139(8A) allows taxpayers to update their returns within two years from the end of the relevant assessment year by voluntarily admitting omissions or mistakes and paying additional tax, providing an opportunity for compliance even after the regular filing deadline.

In essence, the Income Tax Department is a vital pillar of India's fiscal system, constantly evolving to meet the demands of a growing economy, embracing technology to improve efficiency, and striving to foster a culture of voluntary tax compliance for national development.

Conclusion

The Income Tax Department’s enhanced surveillance framework marks a significant step in its fight against tax evasion. By mandating financial institutions to report high-value transactions and enforcing new thresholds for income tax return filing, the department seeks to build a more transparent financial ecosystem.

The latest norms now cast a wider net, even bringing under scrutiny those who were previously exempt from filing tax returns due to lower incomes. Whether it’s large deposits, extravagant foreign travel, or high-value property deals, every financial move is now traceable.

Furthermore, the implementation of higher TDS on large cash withdrawals sends a clear message: financial behavior must align with declared income. With data-driven intelligence at its core, this shift is a wake-up call for high spenders to maintain tax compliance. Individuals and businesses must remain vigilant and consult tax professionals to stay aligned with these evolving norms.