What is Tax Impact of Depositing Rs 2000 notes In your Bank Accounts (2023)?

RBI recently decided to withdraw Rs 2000 banknotes from circulation. Many people were wrongly confusing this as Demonetization 2.0 but this is just a withdrawal and not demonetization.

Still, many people who have Rs 2000 currency notes are worried about the implications of this announcement. More so, they are confused about the Of Depositing Rs 2000 notes In Bank Account? Their worries are mainly – What are the tax implications of depositing Rs 2000 bank notes? Will deposits of Rs 2000 notes be monitored by RBI and authorities? Will you need to pay any tax on Rs 2000 bank note deposits in 2023?

Let’s try to answer these questions, clear your doubts and remove your fears.

The RBI has made it clear that these Rs 2000 bank notes continue to remain legal tender (at least till 30th September 2023). And while there is no limit for depositing these notes in bank accounts, there is a operational limit of Rs 20,000 (or 10 notes of Rs 2000 each) for exchanging these notes in one go.

Whether you know it or not, the cash deposits in bank accounts have been monitored and are subject to reporting requirements for a very long time. This is not a new development just because of Rs 2000 note withdrawal (and deposit).

And this reporting is due to the Statement of Financial Transaction (SFT) rules where banks need to notify the authorities about large cash deposits. This is typically done to prevent money laundering and other illicit financial activities.

Under this rule, in case there is a significantly large cash deposits made in bank account of a persona and which is inconsistent (and disproportionately large compared to) the person’s usual income, financial transactions, the banks might report these transactions to the income tax department. And if the income tax department see these discrepancies, it may use the SFT statement as basis issue a notice to the depositor for clarification. And failing to satisfactorily explain the source of such cash deposits, if it comes to that, may result in tax along with high penalty. So if you are planning to make large deposits of Rs 2000 in your bank account, it makes sense to have documentary evidence and records ready which can justify the source and availability of the Rs 2000 notes cash which match with your balance sheets and tax returns.

Also, while the exchange limit has been restricted to Rs 20,000 at a time, if you deposit Rs 2000 notes into the bank and amount of your deposit exceeds Rs 50,000 in a day, then you anyways have to furnish your PAN details according to Rule 114B of the Income Tax Act.

While monitoring of Rs 2000 banknote deposits is one thing, it doesn’t mean that depositing Rs 2000 bank notes will make it taxable. There would be no tax obligations or tax impact for genuine taxpayers depositing Rs 2000 notes into their bank. They anyways would be holding a very small number of notes, if any, and hence, they can deposit them without any inconvenience or extra tax implications.

The government or tax authorities will only issue notice requiring proof/explanation for large deposits in case deposits do not match or equate with income sources or filed returns.

The Rs 2000 banknote will continue to maintain its legal tender status and the public can continue to use Rs 2000 banknotes for all their transactions and also receive them in payment. But given the deadline for exchange and deposit is 30th September 2023, it is advisable to deposit or exchange these Rs 2000 banknotes on or before September 30, 2023.

RBI has also issued a detailed FAQ on Rs 2000 banknote withdrawal (link) on its website.

I hope this article gives you some clarity about the tax implications of depositing Rs 2000 notes in your bank accounts in 2023.

Note – I am not a Chartered Accountant and hence, my understanding of tax impact of such deposits is limited. The above article should not be considered as a professional advice and is only based on the limited understanding I have about this aspect. Please consult your CA for taxation related queries.

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