The joy of acquiring a new property can quickly turn into anxiety when a notice from the Income Tax Department arrives, questioning the source of your investment. This scenario is becoming increasingly common across India as tax authorities deploy sophisticated data analytics to cross-check a buyer's declared income with their financial transactions.
Why Property Purchases Attract Heightened Scrutiny
According to Abhishek Soni, CEO and Co-founder of Tax2win, the Registrar's office is mandated to report all land purchases exceeding Rs 30 lakh to the Income Tax Department under Section 285BA. This data is then captured in the taxpayer's Annual Information Statement (AIS), creating an automated system for verification. The department's primary goal is to identify if an individual is living beyond their declared means, a potential red flag for tax evasion.
The most frequent trigger for a notice is a query regarding the source of funds. Scrutiny often intensifies when money originates from channels not directly visible in tax records, such as:
- Savings accumulated before the individual started filing tax returns.
- Monetary gifts from relatives or inheritance.
- Proceeds from the sale of assets like gold or shares.
- Loans obtained from friends or family members.
Another common red flag is a discrepancy between the declared purchase price and the stamp duty value (SDV). Soni clarified that if the SDV exceeds the actual purchase price by more than 10% and the difference is over Rs 50,000, the excess amount is treated as taxable income under income from other sources for the buyer.
How to Handle an Income Tax Notice Effectively
Receiving a notice can be daunting, but experts advise a calm and systematic approach. Your first step should be a prompt and accurate response. Do not ignore the communication. Soni recommends organizing all relevant documents, including:
- Bank statements and loan documents.
- Gift deeds or inheritance proof.
- Sale receipts for assets sold.
He emphasizes that clear documentation leads to a quicker resolution. Most notices come with a short window for reply. If you need more time, you should immediately file an acknowledgment and formally request an extension.
Ignoring a tax notice can have serious consequences. It can lead to penalties under Section 272A(2), which imposes a fine of Rs 100 per day until you comply. In severe cases, the department can initiate a full reassessment under Section 148, where the assessing officer can estimate your income based on their judgment.
It is also important to note that purchases of urban agricultural land are treated as capital assets and are reportable. While rural agricultural land deals are less likely to be flagged, the department may still seek proof of income if the transaction value appears disproportionate.
Proactive Steps to Avoid Getting Flagged
Prevention is undoubtedly better than cure when dealing with tax authorities. Tax professionals strongly recommend maintaining proactive financial transparency.
Maintain a clear money trail for all your transactions, Soni told ET. He advised avoiding large cash payments and ensuring formal documentation for all sources of funds, including family loans and inheritances. If such income has not been reflected in your Income Tax Return (ITR), it is prudent to file an updated return before finalizing a major property purchase.
For individuals with multiple or complex income streams, consulting a chartered accountant before a large investment is highly advisable. This ensures that your income declarations and expenditures are aligned and can withstand scrutiny.
With the government's digital monitoring infrastructure expanding rapidly, the tax department's systems are becoming more data-driven and efficient. Paying taxes honestly and maintaining proper records is not just about compliance; it is the foundation for long-term financial peace, Soni concluded.
