Notice asks you to explain a deposit or credit (s.68/69)

A notice arrives. It lists a cash deposit, a credit in your bank account or a loan entry in your books, and asks you to explain it. The wording is short. The consequence of a weak answer is not: the amount can be taxed at a flat high rate with no deduction and no loss set off against it.

This article explains what the law asks of you, how the rate works, and what changed when the Income-tax Act, 2025 replaced the 1961 Act. It is general information, not advice on your notice.

Which Act applies to your notice

The Income-tax Act, 1961 governs assessment years up to 2026-27 (income of financial year 2025-26 and earlier). The Income-tax Act, 2025 governs tax years from 2026-27. A notice about an earlier year is dealt with under the 1961 Act, even though the notice reaches you after 1 April 2026.

The two Acts carry the same idea under different numbers. Using the section-by-section mapping of the 1961 and 2025 Acts:

The 2025 Act sections are described below. The 1961 Act sections work on the same idea; read the 1961 text for your year before you rely on a detail.

What the 2025 Act says about a credit in your books

Section 102(1) of the Income-tax Act, 2025 applies where "any sum is found credited in the books of an assessee maintained for any tax year" and either:

• the assessee "offers no explanation about the nature and source of such credit"; or
• the explanation "is not satisfactory in the opinion of the Assessing Officer".

The sum "shall be charged to income-tax as income of the assessee of that tax year."

Two points matter in practice.

First, the test is an explanation of both the nature and the source. "It is my money" is not an explanation of source. You are expected to say what the credit is (sale proceeds, loan, gift, customer advance, savings) and where it came from.

Second, the Assessing Officer decides whether the explanation is satisfactory. Your answer has to be supported by documents the officer can check.

Loans and share capital: a stricter test

Section 102(2) adds a harder test for a loan, borrowing or "any such amount, by whatever name called". Your explanation is "deemed to be not satisfactory, unless" two things happen:

• the person in whose name the credit is recorded also offers an explanation about the nature and source of the sum; and
• that explanation is found satisfactory by the Assessing Officer.

So for a loan, your own account of it is not enough. The lender's account also counts.

Section 102(3) applies a similar rule to a company that is not one "in which the public are substantially interested". Where the credit consists of share application money, share capital or share premium, the resident person in whose name it is recorded must also explain it and the explanation must be found satisfactory. Section 102(4) says sub-sections (2) and (3) do not apply where that person is a venture capital fund or venture capital company of the kind listed in Schedule V of the 2025 Act.

Investments, assets and expenditure

The other sections follow the same pattern: you offer no explanation, or an unsatisfactory one, and the amount is treated as your income.

• Investment not in your books (s.103, 2025 Act). An investment made in the tax year that is not recorded in your books, or that exceeds the amount recorded. The value of the investment, or the excess, is "deemed to be the income of the assessee of that tax year".
• Asset not in your books (s.104, 2025 Act). An asset found to be owned by you, not recorded in your books, or where the amount spent acquiring it exceeds the amount recorded. Section 104(2) says "asset" includes "money, bullion, jewellery, virtual digital asset or other valuable article". The amount is taxed in the tax year in which the asset is found. This is the section behind questions about cash found at a search or survey.
• Expenditure with no explained source (s.105, 2025 Act). The expenditure, or part of it, is deemed income. Section 105(2) adds that the deemed income "shall not be allowed as a deduction".
• Borrowing or repaying other than by account payee cheque (s.106, 2025 Act). An amount borrowed or repaid through a negotiable instrument or on a hundi, otherwise than by account payee cheque or another mode the Board specifies, is deemed to be the income of the person borrowing or repaying (interest included). Section 106(2) prevents the same amount being assessed again when it is later repaid.

Section 107 of the 2025 Act states that income under sections 102 to 106 "shall be charged to tax as per the provisions of section 195".

The tax rate: why these amounts hurt

Under section 195 of the Income-tax Act, 2025 (counterpart of section 115BBE of the 1961 Act), where your total income includes income under sections 102 to 106, the tax is the aggregate of:

• tax on that income at a flat rate; and
• tax on the rest of your income, as if the unexplained income were taken out.

That flat rate is where the history matters.

• Assessment year 2026-27 and earlier: Income-tax Act, 1961, section 115BBE. The tax is 60% on the income under sections 68 to 69D, under section 115BBE(1)(i), plus tax on the rest of your income as if the unexplained income were left out. (A 30% version of section 115BBE is still published on the tax department site. It is the superseded 2012 original; do not rely on it.) A surcharge of 25% of that tax is added on income taxable under section 115BBE(1)(i). The First Schedule to the Finance Act, 2026 (Part I, Sl. 8) states it for assessment year 2026-27, and the Finance Act, 2025 proviso states it for 2025-26. For earlier years, check the Finance Act of that year.
• Tax year 2026-27 onward: Income-tax Act, 2025, section 195. As enacted, section 195(1)(i) read 60%. The Finance Act, 2026 (section 55) substituted "30%" for "60%" in section 195(1)(i). Sections 2 to 129 of that Act came into force on 1 April 2026, so the 30% applies from tax year 2026-27. We have not verified how the surcharge applies under the 2025 Act; check the Finance Act for your year.

So an unexplained credit or investment of assessment year 2026-27 or earlier is taxed at 60% under the 1961 Act, even if the notice reaches you after 1 April 2026. One of tax year 2026-27 or later is taxed at the section 195 rate in force, which is 30%.

No deduction, no set-off

Section 195(2) of the 2025 Act says that "irrespective of anything contained in this Act", no deduction for any expenditure or allowance, and no set-off of any loss, is allowed against this income. If you have a business loss, it cannot be set off against the unexplained amount. Section 115BBE(2) of the 1961 Act says the same for assessment year 2026-27 and earlier: no deduction for any expenditure or allowance, and no set-off of any loss. One difference: the 1961 text applies this bar to income reflected in the return (clause (a) of sub-section (1)); the 2025 Act bar covers both returned income and income determined by the Assessing Officer.

Which return or order triggers it

Section 195(1) applies in two situations:

• (a) the income is included in your return of income under section 263 of the 2025 Act (counterpart of section 139 of the 1961 Act); or
• (b) the income is included in the total income determined by the Assessing Officer, where it is not already covered by clause (a).

Clause (b) is important for what follows. Section 115BBE(1) of the 1961 Act has the same two limbs.

Penalty

The Income-tax Act, 2025 provides for penalty for under-reporting and misreporting in section 439 (counterpart of section 270A of the 1961 Act, per the mapping). It reads:

• penalty for under-reported income is 50% of the tax payable on that income (section 439(9)); and
• penalty for under-reported income "in consequence of any misreporting" is 200% (section 439(10)).

The listed cases of misreporting in section 439(11) include "failure to record investments in the books of account" and "failure to record any receipt in books of account having a bearing on total income".

The Finance Act, 2026 (section 98) added a new case to that list: "(g) income referred to in section 195(1)(b)". That is, income that the Assessing Officer determines under the unexplained-income sections can be treated as misreported. The Finance Act, 2026 also inserted section 439(13A): where additional income-tax is paid in accordance with section 267(5)(ii), the income on which it is paid "shall not form the basis of imposition of penalty under this section."

These are rules of the 2025 Act. Penalty under section 270A of the 1961 Act applies to assessment year 2026-27 and earlier; we have not checked its text for this article, so have it checked for your year.

What to do when the notice arrives

• Read the notice and note the date for your reply. The date for a response is on the notice itself. Do not estimate it.
• Identify the entry. Match each amount in the notice to your bank statement, your books and your return. Many notices arise from a mismatch between what was reported and what the bank or another party reported.
• Say what it is and where it came from. For each credit, give the nature (sale, loan, gift, refund, withdrawal redeposited) and the source, with documents.
• Build the documents for the kind of source.

• Answer on the portal within the date. An answer sent late or with no documents is treated the same as no explanation.
• Keep the answer consistent with your return. An explanation that contradicts a figure you already reported creates a new problem.

What not to do

• Do not offer a round-number guess. The officer tests the explanation against records.
• Do not rely on "it was a gift" or "it was a loan" without the other person's papers.
• Do not delay the reply while you look for documents. Reply on time, and say which documents will follow.
• Do not try to change your books to fit the explanation. A false entry in the books is on the list of misreporting cases (section 439(11)(d), 2025 Act).

What to do now

• Next step: match every amount in the notice to your bank statement and books, and list the document that proves its source.
• Deadline: the date printed on your notice. If it is close, ask for time in writing before it expires.
• What follows a weak answer: the amount is taxed as income at the section 115BBE rate (1961 Act, earlier years) or the section 195 rate (2025 Act, tax year 2026-27 on), with no deduction or loss set-off, and penalty under section 270A (1961 Act) or section 439 (2025 Act) may follow.

Have a CA review your facts before you act or file.

FAQs

Is a cash deposit always taxed under these sections?
No. The sections apply only when you offer no explanation, or one that is not satisfactory in the Assessing Officer's opinion (sections 68 to 69C, 1961 Act; sections 102 to 105, 2025 Act). A deposit from earlier withdrawals, a sale or a documented loan is a matter of explaining and proving it.

What is the difference between a credit and an investment or an asset?
A credit is a sum credited in your books (section 102). An investment is something you made and did not record, or recorded for less (section 103). An asset is something you own that is not recorded, and it includes money, bullion and jewellery (section 104).

Can I set off my business loss against the unexplained amount?
Not under the 2025 Act. Section 195(2) bars set-off of any loss and any deduction against the income covered by sections 102 to 106. For assessment year 2026-27 and earlier, section 115BBE(2) of the 1961 Act bars set-off of loss against income reflected in your return.

Does the 30% rate apply to my notice for assessment year 2024-25?
The 30% comes from the Finance Act, 2026 amending section 195 of the 2025 Act, which applies from tax year 2026-27. An earlier year falls under the 1961 Act, where section 115BBE carries 60% (plus the surcharge the Finance Act of that year provides).

I am a company. Is the test different?
For share application money, share capital or share premium of a company in which the public are not substantially interested, yes. Section 102(3) requires the resident person who put the money in to explain it too.

Will a penalty always follow?
No. Penalty under section 439 of the 2025 Act applies to under-reported or misreported income, at 50% or 200% of the tax on it. Whether it applies depends on the order passed. The Finance Act, 2026 also says income on which additional tax is paid under section 267(5)(ii) does not form the basis of a penalty under that section.

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