Can UPI, NEFT or RTGS transfers trigger income-tax notice? What to know | Finance News

In an increasingly digital economy, everyday payments have moved from cash to mobile-based and bank-based channels. From paying ₹20 to a vegetable vendor to transferring large sums through Unified Payments Interface (UPI), National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS), Immediate Payment Service (IMPS), PhonePe, Google Pay or Paytm, digital transactions have become routine.

 

But this convenience has also created concern among taxpayers: Can frequent online transactions or large digital transfers invite an income-tax notice? Is every digital transaction being monitored by the government?

 

Tax experts say merely sending or receiving money digitally does not automatically lead to a tax notice. However, certain high-value transactions and unusual patterns can bring a taxpayer under scrutiny.

 

Does the government monitor every digital transaction?

Tax experts say one of the biggest misconceptions among taxpayers is that the income-tax department watches every small UPI transaction in real time.

 

That is not the case, said Chandni Anandan, tax expert at ClearTax. According to her, a person does not receive an income-tax notice only because money was transferred or received digitally.

 

Mihir Tanna, associate director, direct taxes, SK Patodia & Associates LLP, said the income-tax department does not track every small transaction like an ordinary user would. Instead, there is a structured reporting mechanism.

 

Banks and other reporting entities submit a Statement of Financial Transactions (SFT) to the government when certain transactions cross prescribed thresholds. If a person’s transactions remain within normal limits and are consistent with declared income, there is usually no reason to worry, experts said.

Which transactions come under the tax department’s watch?

The income-tax department focuses on large-value transactions and certain transaction patterns. Anandan and Tanna pointed to several thresholds that may be reported under the SFT framework.

 

If cash deposits in a savings account are ₹10 lakh or more in a financial year, the bank reports the transaction to the tax department. In the case of current accounts, cash deposits or withdrawals of ₹50 lakh or more come under reporting.

 

Credit card payments are also tracked above specified limits. If a person pays more than ₹1 lakh in cash towards a credit card bill, or makes payments of ₹10 lakh or more through any mode, including UPI or NEFT, in a financial year, the transaction is reported.

 

Large purchases and investments are also covered. Fixed deposits, shares, mutual funds, bonds or debentures of ₹10 lakh or more, and sale or purchase of immovable property of more than ₹30 lakh, fall within the SFT reporting framework.

 

Spending above ₹10 lakh on foreign currency or forex cards in a financial year is also reported by authorised dealers.

 

According to him, AI-based tools can detect patterns such as layering or round-tripping, where money is moved through different accounts or routes to conceal its origin or purpose.

 

Anandan said digital transaction records are reflected in the Annual Information Statement (AIS). The department’s automated tools compare the information available in AIS with the income declared in the Income Tax Return (ITR). If there is a significant mismatch between declared income and transactions in bank accounts, the case may be flagged for further examination.

What happens if a tax notice is issued?

If large bank transactions or digitally received funds do not match the income disclosed in the ITR, the taxpayer may face scrutiny.

 

Anandan said such cases may be selected for scrutiny assessment. If the income-tax department concludes that money credited to a taxpayer’s account does not have a valid and verifiable source, it may be treated as unexplained income. In such cases, the taxpayer may have to pay higher tax and penalty.

 

In serious cases, where the department detects undisclosed income, the combined tax and penalty liability may be around 78 per cent, she said.

 

Tanna said if the department has credible information that income has escaped assessment, it can reopen past cases for up to four to six years, subject to the provisions of the law.

How taxpayers can reduce the risk of notices

Experts said taxpayers can avoid unnecessary income-tax notices by keeping proper records and ensuring that digital transactions are consistent with declared income.

 

Personal and business accounts should be kept separate. A savings account used for everyday personal transactions should not be used for frequent business receipts and payments. Freelancers and small business owners should maintain proper records of professional income.

 

Credit cards should be used carefully. Taxpayers should avoid allowing others to use their credit cards for personal spending. Since the card is issued in the taxpayer’s name, all expenditure on it is linked to the cardholder and may appear disproportionate to declared income.

 

If a person receives a large gift or sum from relatives, supporting documents such as a gift deed and proof of the source of funds should be maintained.

 

Taxpayers should also check AIS and Form 26AS before filing returns. If any incorrect or unrelated transaction appears in AIS, the feedback option on the income-tax portal should be used to report the discrepancy.

 

The safest approach, experts said, is to ensure that one’s digital footprint is in line with actual income and the income disclosed in the ITR. Reconciling personal records with AIS before filing the return can help identify errors early and reduce the risk of avoidable notices later.