Tax implications on Black Money: The Demonetization impact!

Prime Minister Narendra Modi led government caught the nation by surprise on November 8th, 2016, in a massive demonetization move. 3 weeks on, and the crackdown has only intensified to ride out the ills of black money hoarding and illegal monetary activities in the country.


Following the bold stance, the Finance Minister, Arun Jaitley introduced a bill to amend the Income Tax Act, in Lok Sabha, on Monday, November 28th, and proposed an alternative scheme called ‘Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016’.  The scheme provides a window to black money holders, wherein the government has proposed to levy a total tax, penalty and surcharge of 50% on the total amount of unaccounted income deposited post demonetization, and a penalty of 85% shall be levied on those who do not disclose but are caught in possession of black money.


A person declaring such unaccounted wealth in banned Rs 500 and Rs 1000 rupee notes, under this scheme, will have to pay a tax at the rate of 30% of undisclosed income, plus a 10% penalty on the undisclosed income and an additional 33% as ‘Pradhan Mantri Garib Kalyan Cess’ (“PMGKY”) on the amount of tax (ie 33% of 30%). The net tax rate under this scheme comes out to be around 49.9%


The declarant will have to deposit 25% of the (remaining) undisclosed income in a scheme to be notified by the government in consultation with the RBI. This deposit will be made without interest and with a lock-in period of 4 years. The Bill, which is the second amendment to the Tax Act in 2016, provides an opportunity to the black money holders to declare the unaccounted wealth without being enquired about the source of fund. It will provide immunity from wealth tax, civil laws and other taxation laws. The money deposited in the scheme will be used for welfare projects in irrigation, housing, primary education, health, infrastructure etc, to ensure justice, equality and growth across all strata of society.

Now let us understand the above with an example:

Say, you hold black money of Rs 10,00,000 and you declare the same under the proposed scheme, the tax liability will be as under:


Income tax @ 30% = Rs 3,00,000 (ie 30% of Rs 10,00,000)


Penalty @ 10% = Rs 1,00,000 (ie 10% of Rs 10,00,000)


PMGKY Cess @ 33% of income tax = Rs 99,000 (ie 33% of Rs 3,00,000)

Total tax payable by you under this scheme = Rs 4,99,000

The current provisions of penalty of 50% on under reporting and 200% on misreporting of unaccounted wealth will remain unchanged. Deposits which have already been made since November 9th will also be covered under PMGKY. The last date for such declaration is yet to be announced but will most likely be December 30th (ie last day on which the demonetisation scheme is proposed to be closed).


Though it still remains to be seen how and to what extent this scheme helps in the fulfilment of the objective of demonetization, it is certain that strict regulations and penalties will control the magnitude of malpractices that are carried out in a cash economy like India. Revision in taxation and penalty rates on massive unaccounted wealth is something that is sure to make black money holders think before taking the economic system for granted and carrying out corrupt practices, unchecked and unabated.

Wondering how this scheme can affect you? Talk to our expert and know the impact in detail.  Click here to know more. 

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