Tax Notice on Cash Deposit, Property Sale or Credit Card Spending? Action Guide

Who this guide is for

This guide is for individuals in India who have received a communication from the Income Tax Department about a specific high-value transaction. The department now receives automatic reports of many transactions through your Annual Information Statement (AIS) and Form 26AS. When a reported transaction looks out of step with your tax return, you may get a notice or an inquiry message. This guide helps you if you are:

• A person who deposited a large amount of cash in a savings or current account and got a query about it.
• A seller of property who received a notice referring to the registered sale value or stamp value.
• A cardholder whose annual credit card spending crossed a reporting threshold and triggered a question.
• Someone who got a short message or e-campaign nudge asking them to confirm or explain a transaction in their AIS.
• A salaried person, pensioner, homemaker, farmer or small trader who is worried because the amount looks big next to their declared income.

This guide covers the general approach to explaining the source of funds behind such transactions. It does not give you a personalised tax calculation or a ready legal opinion. Where the stakes are high, a qualified Chartered Accountant or tax practitioner is essential. If your notice is specifically about a defect in your return or a tax demand, see the related guides linked below, because the response process is different.

What you can do this weekend

Friday evening

Read the notice slowly, twice. Identify three things: the exact transaction it asks about, the reference or document identification number, and the deadline to respond. Write these down. Note which financial year and assessment year the notice covers, because your proof must relate to that period.

Log in to the income tax e-filing portal and open your Annual Information Statement (AIS) and Form 26AS. Find the exact entry the notice refers to. Check whether the reported amount is correct. Sometimes the figure itself is wrong — a duplicate entry, a transaction that is not yours, or a wrong value. If so, that becomes part of your answer.

Do not panic and do not reply in haste on Friday night. A rushed, unsupported answer is worse than no answer. Spend the evening only on understanding the question.

Saturday

Now build the money trail. For a cash deposit, trace where the cash came from: earlier cash withdrawals from your own account, sale of goods with bills, agricultural produce sale records, a documented gift, repayment of a loan you had given, or accumulated savings from past declared income. Print bank statements that show the deposit and any earlier withdrawals.

For a property sale, pull the registered sale deed, the buyer's payment proof, the bank credit of the sale money, and your purchase deed or cost records so you can work out capital gains correctly. For a credit card spend, download the full year's card statements and the bank statements showing how each bill was paid, then link those payments to salary, business income or savings.

Lay every document next to the transaction it explains. The goal is a chain a stranger can follow: this money came from here, moved to there, and funded this transaction. Gaps in the chain are exactly what you must fill or honestly flag.

Sunday

Draft your written explanation in plain language. State the source of the money, refer to each attached document by an annexure number, and answer the precise question the notice asked — nothing more, nothing less. Use the template lower down this page as a starting point.

If the amount is significant, or if any part of the money cannot be cleanly traced, call a Chartered Accountant before Monday. A short paid consultation can stop you from making a statement that creates a bigger problem. For property sales especially, get the capital gains computation reviewed by a professional.

Scan all your documents into clear PDFs, name them by annexure, and keep the originals safe. You are now ready to file the response on the portal on Monday, well before the deadline.

Documents and evidence checklist

Step-by-step action plan

Step 1 — Read the notice and confirm what is actually being asked

Notices come in different forms. Some are informal e-campaign messages asking you to confirm a transaction in your AIS. Others are formal inquiries during processing or assessment. The wording tells you what to do and by when. Identify the transaction, the financial year, the reference or document identification number, and the deadline. Do not assume the worst — most of these are verification queries, not accusations.

Step 2 — Check the reported figure in your AIS and 26AS

Open your AIS on the income tax e-filing portal and find the exact entry. Banks, sub-registrars and card issuers report high-value transactions, and the data is not always correct. The deposit may be double-counted, the sale value may be misread, or the transaction may not even be yours. If the figure is wrong, you can submit feedback on the AIS to mark it as such — see our guide on a high-value transaction in AIS that is not yours.

Step 3 — Trace the source of funds, transaction by transaction

This is the heart of your answer. The department is not punishing you for spending or depositing money — it wants to see that the money came from income you have already declared or from a legitimate, explainable source. For each flagged transaction, write one line: where did this money come from? Then attach the proof for that line. A cash deposit traced to an earlier withdrawal from your own account is easy to explain; cash with no documented origin is the hard case where you may need a CA.

Step 4 — Match property and card cases to their specific proof

For a property sale, the question is usually about whether you computed and reported capital gains correctly, and whether the sale money is accounted for. Gather the sale deed, your cost records, and proof that the sale proceeds reached your bank. For credit card spending, link each year's bill payments back to your declared income through your bank statements. If you used a supplementary card or paid someone else's bills, explain that arrangement honestly with proof. For the card mechanics themselves, our overview of credit card charges in India can help you read your statement.

Step 5 — Draft a clear, truthful written explanation

Write a short letter that answers only the question asked. State your name, PAN, the assessment year, and the transaction. Explain the source in simple sentences. Refer to each document by annexure number. Do not volunteer unrelated information, and never write something you cannot back with paper. A clean, document-backed reply is what closes the file. Use the template further down as your starting point.

Step 6 — Respond on the income tax e-filing portal before the deadline

Log in to the income tax e-filing portal and open the section named in your notice — commonly Pending Actions, e-Proceedings or the Compliance / AIS area. The exact path varies by notice type, so follow what your notice states. Upload your written explanation and scanned annexures, submit, and save the acknowledgement. If you genuinely need more time, request an adjournment through the portal before the deadline rather than letting it lapse.

Step 7 — Take professional help where the stakes are real

If the amount is large, the source is hard to document, the notice is a formal assessment notice, or you simply feel out of your depth, engage a qualified Chartered Accountant or tax advocate before replying. The cost of advice is small next to the tax, interest and penalty that a botched reply can trigger. A professional will frame the response correctly and represent you in any hearing.

Step 8 — Track the outcome and use grievance routes if stuck

After you reply, watch the portal for the officer's response. If the matter is resolved, keep the closure communication. If you face an unreasonable delay or a procedural problem with a grievance you have raised, you can escalate through the portal's grievance mechanism and, for service issues, through CPGRAMS. These routes are for service and grievance problems, not for re-arguing the tax merits, which belong in the response and appeal process.

Escalation ladder

Copy-paste response template

Replace the text in square brackets with your own details before submitting. Have a Chartered Accountant review it if the amount is large.

When RTI can help

The Right to Information Act, 2005 applies to public authorities, and the Income Tax Department is one. RTI can be a useful supporting tool in a transaction-inquiry situation in specific ways:

• Asking about procedure: You can ask the Central Public Information Officer (CPIO) of the relevant Income Tax office for the general procedure or guidelines followed in verifying high-value transactions, where such information is in the public domain.
• Status of a pending grievance: If you have filed a grievance and received no response within a reasonable time, RTI can help you find out what action, if any, was taken on it and by whom.
• Records the portal does not show: Most of your own assessment information is already available on the income tax e-filing portal, which is faster than RTI. Use RTI only for records you genuinely cannot access directly.

To file an RTI online with a central government authority, see our step-by-step RTI filing guide. The CPIO must reply within the statutory period. If you get no reply or an inadequate one, see filing a first appeal under RTI Section 19 and our overview of the first and second appeal process. For broader strategy on using RTI in regulatory matters, The RTI Playbook is a useful companion.

When RTI will not help

RTI has clear limits when you are responding to a tax notice:

• RTI cannot answer the notice for you: The only thing that closes a transaction inquiry is a proper, document-backed response to the officer through the portal. RTI is for information, not for substantive tax decisions.
• RTI cannot reduce your tax or reverse a demand: Disputes about the tax itself go through the response, rectification and appeal process — not through an RTI application.
• Third-party and private records: RTI does not give you another taxpayer's records, nor your bank's or card issuer's internal files, since private banks are not public authorities for most of their commercial functions. Get those records directly from the bank or card company.

Common mistakes to avoid

• Ignoring the notice: Silence does not make it go away. The officer can decide on the information already available, which usually means an addition to your income and a demand. Always respond, even if only to seek time.
• Giving a false or guessed explanation: This is the most dangerous mistake. A statement that does not match your bank or registry records can convert a routine inquiry into a concealment case with penalty exposure. Say only what you can prove.
• Replying without documents: A bare claim that "this was my savings" carries little weight. Every line of your explanation needs a paper to support it, indexed to an annexure.
• Confusing the reported figure with reality: The AIS or 26AS figure can be wrong. Check it before you accept it. If it is incorrect, submit AIS feedback and say so in your reply.
• Treating a property sale as just a deposit question: A sale often raises a capital gains question too. Work out and report the gain correctly, with cost records, rather than only explaining where the money landed.
• Paying or back-dating to fix the trail: Do not move money around or create paperwork after the fact to dress up the source. It rarely helps and can create fresh problems.
• Skipping professional help on a big amount: For large or complex matters, going it alone to save a consultation fee is a false economy. A CA's framing can be the difference between a closed file and a long dispute.
• Missing the deadline: Always submit or request more time before the date passes. A lapsed deadline narrows your options sharply.

For related situations, see our guides on responding to a defective return notice, handling an income tax demand notice and refund adjustment, and acting when your PAN is misused for an unknown account or loan.