A growing concern has emerged regarding the implementation of Rule 114E(2) of the Income Tax Rules, which governs the reporting of high-value financial transactions by banks and other financial institutions. Experts warn that the way the rule is currently applied is resulting in unnecessary tax notices being issued to innocent taxpayers, particularly non-contributing joint account holders.
Under Rule 114E, financial institutions are required to file Specified Financial Transaction (SFT) reports for certain high-value transactions—such as cash deposits, mutual fund purchases, and investments in bonds or debentures—exceeding ₹10 lakh in a financial year. However, when these accounts or investments are held jointly, the full value of the transaction is reported against the PAN of all account holders, irrespective of who actually funded the transaction.
This has led to a peculiar situation where, for example, a deposit of ₹10 lakh made solely by one account holder appears as a ₹10 lakh transaction in the Annual Information Statement (AIS) of every joint holder. Tax professionals note that attempts by joint holders to clarify through AIS feedback that they did not make the transaction are often rejected by reporting institutions citing the current wording of Rule 114E(2). Consequently, many taxpayers—especially non-filers, homemakers, and senior citizens who are secondary account holders—are receiving automated verification alerts and even reassessment or inquiry notices.
Tax practitioners highlight several cascading problems from this reporting practice:
- Duplicate entries in AIS, leading to a mismatch between reported financial activity and actual income.
- Compliance burdens, where individuals with no taxable income face unnecessary scrutiny.
- Increased litigation risk, as revenue authorities initiate inquiries without clarity on true ownership of income.
Legal experts point out that financial institutions, in the absence of specific guidance, adopt a conservative stance by attributing the entire value of the transaction to all joint holders. While tax liability ultimately depends on who owns the income, identifying the true contributor requires a fact-intensive process that is cumbersome for both taxpayers and the authorities.
The problem is particularly acute among senior citizens, many of whom add their spouse or children as joint holders for convenience or succession planning. These secondary holders often have no independent source of income, yet face e-verification notices simply because they appear as joint holders.
Professionals stress that the issue is not confined to senior citizens alone; the rule applies uniformly to all taxpayers. Even young individuals or low-income joint holders could see high-value transactions in their AIS, triggering automated compliance actions.
Experts suggest several measures taxpayers should consider until the law is clarified:
- Carefully review AIS and TIS data to identify entries related to joint holdings.
- Provide appropriate feedback by marking transactions as relating to another PAN, while maintaining documentary proof.
- Ensure only the actual contributor reports the income arising from such transactions.
- Consider filing an ITR voluntarily, even when not legally required, if high-value transactions appear in AIS.
Tax specialists also urge policymakers to design a robust mechanism for mapping joint accounts to the actual owner of funds. While a limited framework exists for matching TDS credits with the rightful taxpayer, there is currently no equivalent system for joint account ownership reporting under SFT.
Without reform, experts warn, the present system will continue to burden non-contributing joint holders with unwarranted compliance notices. Stakeholders are calling for an urgent policy review to ensure that the integrity of the SFT framework is maintained while safeguarding ordinary taxpayers—particularly the elderly—from undue hardship.
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