After the announcement of the withdrawal of 2000 notes from circulation, a significant number of individuals from the public swiftly labeled it as 'mini-demonetization' or demonetization 2.0. However, it is essential to note that the Reserve Bank of India (RBI) has clarified that the Rs 2,000 notes remain legal tender, unlike the previous demonetization in November 2016, which involved the banning of Rs. 500 and Rs. 1000 notes.

As per the press release by the RBI, the exchange of Rs 2,000 notes into smaller denominations is not considered demonetization but rather a part of the 'Clean Note' policy. The Rs 2,000 notes will continue to be accepted as legal tender even after September.

However, when it comes to the taxation of deposits made by the public, there is a significant aspect to consider. India's largest lender, SBI, has recently confirmed that it has received deposits amounting to Rs 14,000 crore in Rs 2000 notes since the process commenced last week.

For accurate and detailed information regarding the taxation of deposits, it is advisable to consult a tax professional or refer to the guidelines provided by the Income Tax Department of India. So, the question arises: Are both big and small deposits subject to taxation? Let's delve into this matter to find out the answer.

According to income tax guidelines, individuals who deposit cash amounts exceeding Rs. 2.5 lakh, and senior citizens who deposit cash amounts exceeding Rs. 5 lakhs, may be subject to scrutiny. However, any deposits within the specified limits are generally excluded from scrutiny, assuming that the funds are sourced from household savings, cash withdrawals, previous income, and similar sources.

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In the case of individuals without business income, deposits exceeding the mentioned limits will be verified by assessing officers.

In the current situation, legitimate cash deposits made in bank accounts using Rs. 2,000 denomination notes can be adequately explained. These deposits can be attributed to regular household savings, previous cash withdrawals, cash gifts from close family members, gifts received during marriage ceremonies, or cash sales for proprietors and businesses. However, it is essential to support such claims with genuine documentary evidence.

According to income tax provisions, businesses are permitted to have cash sales of up to Rs 2 lakh from a single person in a day. Following the announcement by the RBI, there has been a significant increase in cash sales, particularly in Rs 2,000 notes, across various sectors including food delivery apps, petrol pumps, malls, grocery stores, hospitals, and jewelry stores.

Once the business owner can provide sufficient evidence to establish the authenticity of cash sales made in Rs 2000 notes, both during and after the specified period (from May 19 onwards, including after September 30), the tax authorities cannot dismiss or reject the legitimacy of cash deposits based solely on variations in the ratio of cash sales compared to previous periods. 

It is important to present supporting documents such as sales invoices, bank statements, buyer confirmations, GST returns, and evidence of a correlation between cash sales, purchases, and stocks. It should be recognized that businesses do not necessarily follow a fixed sales pattern, as highlighted in the Mint report.

Furthermore, if a business owner has already accounted for their cash sales as business income, it would be considered double taxation and not permissible to levy taxes on the cash deposits derived from those cash sales as unexplained cash credits.

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Therefore, individuals who possess valid and legitimate explanations for the sources of cash deposits in Rs 2,000 notes should not be alarmed by the RBI announcement. They should proceed with depositing their hard-earned money into their bank accounts while ensuring that they retain all necessary supporting documents as evidence to substantiate these cash deposits.

In addition, banks will have the obligation to inform the income tax department about significant cash deposits of Rs 2,000 in currency notes that exceed a certain threshold. This requirement is part of the statement of financial transactions (SFT) that banks are required to submit to the tax authority on an annual basis.

Nevertheless, it is not necessary to provide the exact currency denomination of the deposits. This measure will enable tax officials to scrutinize significant cash deposits made during the process of phasing out Rs. 2,000 notes. These officials routinely analyze the data to identify instances of tax evasion. The reporting thresholds for such deposits are set at Rs. 10 lakhs for term and savings deposits, and Rs. 50 lakh for current account deposits, as disclosed by anonymous sources familiar with the matter.

It should be noted that this reporting system has been in place for a significant period and is not a recent provision introduced in response to the RBI's decision to withdraw Rs. 2,000 notes. This information was confirmed by a third individual who, similarly, preferred to remain anonymous.

"Although it is reasonable for individuals to keep some cash for unforeseen circumstances, the presence of substantial amounts of cash, particularly in high-denomination notes, instead of earning interest, may raise questions. 

This behavior may require an explanation, especially if the deposit appears disproportionate to the income declared in the tax return," one of the aforementioned individuals stated anonymously. 

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The third individual, who possesses knowledge about the functioning of the tax department, cautioned against prematurely speculating whether large cash deposits following the withdrawal of Rs. 2,000 notes would undergo scrutiny. "Let individuals exercise their right to deposit or exchange cash. It is not appropriate to unnecessarily alarm the public," the person asserted.

Also, Read: "Crypto Taxation Guide Budget 2022".