Which transactions can trigger notice from Income Tax Department? Know rules for large cash deposits and UPI transfers
Receiving large amounts through UPI does not automatically attract an income tax notice. However, taxpayers whose bank accounts show substantial credits that do not match their declared income may face questions from the Income Tax Department, even if the money was received through legitimate digital transactions.
Consider a salaried individual who declares an annual income of ₹12 lakh but receives ₹40 lakh in their bank account during the year. The additional credits could include money from friends, family transfers or business receipts. While these transactions are not necessarily taxable, the individual may have to explain their source if questioned by tax authorities.
According to CA Parag Jain, Tax Head at 1 Finance, there is no fixed annual UPI transaction limit under income tax law. What matters is whether taxpayers can establish the nature and source of money credited to their accounts.
Jain said there is a widespread misconception that UPI transfers exceeding a particular amount are automatically reported to the Income Tax Department.
Under the Statement of Financial Transactions (SFT) framework, specified cash deposits are reportable when they reach ₹10 lakh annually in savings accounts or ₹50 lakh in current accounts. These cash-deposit thresholds do not apply to UPI, NEFT, RTGS or IMPS transfers.
However, this does not mean digital transactions are beyond scrutiny.
Bank statements can be examined during tax proceedings, and taxpayers may be asked to explain credits that appear inconsistent with their declared income.
Jain explained that commonly cited UPI limits, including ₹1 lakh per transaction and higher limits for specified categories, are operational restrictions prescribed by NPCI and banks. They are not income tax thresholds.
Under Section 102 of the Income Tax Act, 2025, unexplained credits can attract tax consequences if the taxpayer cannot satisfactorily establish their source.
A credit of ₹60,000 can therefore be questioned just as a ₹6 lakh credit can. The amount alone does not determine whether an explanation is required.
For individuals receiving regular payments through UPI, the tax treatment depends on the purpose of the transfer.
Jain explained that money received for providing a service is generally treated as business or professional income. However, money received from a friend to split a restaurant bill is not income merely because it enters a bank account.
The difficulty arises when both types of receipts are routed through the same account.
Jain cited the example of Karnataka, where more than 13,000 small traders reportedly received GST notices in 2025 based on UPI inflows. In some cases, traders had collected payments on behalf of others, making their bank credits appear higher than their actual business turnover.
A vegetable vendor in Haveri reportedly received a notice involving ₹29 lakh despite selling GST-exempt produce.
According to Jain, using one UPI ID for personal and business transactions can create difficulties when taxpayers are asked to reconcile their receipts.
He recommended maintaining a separate account for professional income, issuing invoices for payments and keeping records that distinguish business receipts from personal transfers.
Another potential concern arises when individuals receive money into their bank accounts and subsequently transfer it to someone else. For example, a person may collect money from several friends for a group purchase or receive funds on behalf of a relative.
While such arrangements may be legitimate, Jain warned that repeated inward and outward transfers can resemble the transaction patterns associated with money mule accounts. Banks and investigating agencies scrutinise such accounts because they may be used to move proceeds of financial fraud.
From an income tax perspective, Jain said unexplained credits can be examined even when the money has subsequently been transferred elsewhere. Simply forwarding the amount does not establish that the original credit was legitimate or exempt from tax.
However, a transaction pattern alone does not establish involvement in money laundering. Any legal consequences depend on the underlying facts and applicable law.
Jain advised taxpayers to maintain written records showing who transferred the money, why it was received and to whom it was subsequently sent. Supporting bank statements and contemporaneous records can help establish the purpose of the transactions.
For taxpayers receiving frequent UPI payments, the central distinction is between the amount credited to an account and the income actually earned. While large digital transfers are not automatically taxable, taxpayers should be able to explain the source and purpose of credits if questioned by tax authorities.
Kirti jha
Kirti Jha is a Senior Content Producer at Mint, where she writes on mutual funds, taxation, personal finance and macroeconomic developments. Her reporting focuses on helping readers understand complex financial developments through data-driven, research-backed stories that explain how policy changes, market trends and regulatory decisions affect investors and households. <br><br> Before joining Mint, Kirti worked at ET Money, where she specialised in mutual fund research and investment analysis. She tracked portfolio disclosures, fund manager strategies, sectoral allocation shifts and investment trends, distilling large datasets into investor-focused insights. Her work combined quantitative analysis with consumer-centric storytelling, enabling readers to better understand fund positioning, portfolio changes and long-term investment opportunities.<br><br> Kirti holds a Bachelor's degree in Economics from Indraprastha College for Women, University of Delhi, and a Master's in Finance from the Jindal School of Banking & Finance at O.P. Jindal Global University. Her academic training emphasised analytical thinking, quantitative research and financial decision-making, providing a strong foundation in understanding capital markets, financial systems and economic policy. With a combined experience in investment research and financial journalism, she is committed to producing accurate, accessible and insightful journalism that empowers readers to make well-informed financial decisions.
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