"This is my own money" is one of the most common explanations given in income-tax assessments. It is offered when a proprietor introduces capital, when a partner contributes funds to a firm, when cash is deposited in a bank, or when money moves between family members' accounts. The statement may well be true, but income-tax law does not tax or exempt money on the basis of ownership. It asks where the money came from, and whether that trail can be shown.
This article explains the provisions under which unexplained capital and deposits are taxed, their equivalents in the Income-tax Act, 2025, the tax cost of an unexplained source, how common explanations such as past savings, earlier withdrawals and gifts are tested, and the documentation that should be kept at the time of the transaction.
Key points at a glance
- Unexplained credits, investments, money and expenditure are taxed under Sections 68, 69, 69A and 69C of the 1961 Act, now Sections 102, 103, 104 and 105 of the Income-tax Act, 2025.
- The burden of explaining the nature and source of a credit is on the taxpayer, not the department.
- Income added under these provisions is taxed at a flat 60% plus 25% surcharge and cess (Section 115BBE, now Section 195), an effective rate of 78%, with no deductions or set-off of losses.
- Explanations such as savings or earlier withdrawals must be supported by timing, amounts and evidence; the test is traceability, not intention.
- The strongest position is built when the funds move, not during the assessment.
Which provisions apply to unexplained capital and deposits?
| Situation | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| Sum credited in books (capital, loan, receipt) not satisfactorily explained | Section 68 | Section 102 |
| Investments not recorded in books | Section 69 | Section 103 |
| Money, bullion, jewellery or valuables found and not explained (including cash deposits in many cases) | Section 69A | Section 104 |
| Expenditure whose source is not explained | Section 69C | Section 105 |
| Rate of tax on such income | Section 115BBE | Section 195 |
For a proprietor, capital introduced in the business books is a credit in the proprietor's own books, so Section 68 applies directly. For a firm or company, the credit is in the entity's books, and the entity must explain the identity and creditworthiness of the partner or shareholder and the genuineness of the transaction. For loans and share capital, the entity must also explain the source of the lender's or investor's funds, as discussed in the separate article on Section 68.
Why "my own money" is not enough
The Supreme Court held in Kale Khan Mohammad Hanif v. CIT (1963) and Roshan Di Hatti v. CIT (1977) that the onus of proving the source of a sum found credited in the books lies on the taxpayer. If the explanation is not satisfactory, the Assessing Officer may treat the amount as income.
Ownership of money is a conclusion; the source is a fact. An officer examining capital of ₹30 lakh introduced in March will want to know whether it came from an identified bank account, whether that account had the balance, how the balance was built up, and whether that income was already taxed. A claim of ownership without these links is treated as an unproved explanation.
How are common explanations tested?
Past savings
Savings are accepted when they match the taxpayer's returned income over earlier years, after reasonable household expenses. A person with modest declared income claiming large accumulated savings will be asked to reconcile the two.
Earlier cash withdrawals
Redeposit of cash withdrawn earlier is a frequent explanation. It is stronger when the gap between withdrawal and redeposit is short and there is no evidence that the cash was used elsewhere. A withdrawal several months or years before the deposit, with no explanation of why cash was held, is often rejected on the test of human probabilities laid down by the Supreme Court in Sumati Dayal v. CIT (1995).
Gifts from relatives
Gifts from specified relatives are not taxable under Section 56(2)(x) of the 1961 Act, and the corresponding provision of the 2025 Act. However, the exemption only applies once the gift is proved. The donor's identity, relationship, capacity and the banking trail must be established; a gift from a relative with no means to make it will be treated as the recipient's own unexplained money.
Loans from friends or family
A loan must be supported by a confirmation, the lender's PAN, the bank transfer and, where amounts are significant, the lender's source of funds. Cash loans of ₹20,000 or more also attract the penalty provisions for contravention of the cash loan restrictions.
Practical point: Intent is not the test. A genuine source that cannot be linked by date and amount to the credit is treated in the same way as no source at all. Timing alignment between the source and the credit is often what decides the case.
What does an unexplained source cost? A worked example
Consider a proprietor who introduces ₹25,00,000 as capital during Tax Year 2026-27 and explains it as follows:
- ₹10,00,000 from maturity of a fixed deposit, transferred directly from the bank account: fully traceable.
- ₹8,00,000 received as a gift from a parent by bank transfer, with the parent's bank statement showing sale proceeds of land: accepted.
- ₹7,00,000 deposited in cash, explained as withdrawals made two years earlier: no evidence of why cash was held, rejected.
- Addition under Section 102 (earlier Section 68): ₹7,00,000.
- Tax at 60%: ₹4,20,000.
- Surcharge at 25% of tax: ₹1,05,000.
- Health and education cess at 4% on ₹5,25,000: ₹21,000.
- Total tax: ₹5,46,000, or 78% of the addition, plus interest.
In addition, a penalty of 10% of the tax may be levied under the provision corresponding to Section 271AAC where the income was not offered in the return. No deduction, exemption or loss set-off is allowed against this income.
Documents that close the question
- Bank statements of the account from which the money came, showing the opening balance and the build-up.
- Income-tax returns of the person providing the funds for the relevant years.
- For gifts: a gift deed or letter, proof of relationship and the donor's bank statement.
- For loans: a loan confirmation, the lender's PAN and return, and the bank transfer record.
- For sale of an asset: the sale deed or contract note, and the receipt of proceeds in the bank.
- For redeposit of cash: a withdrawal-deposit reconciliation with dates, and any evidence of why the cash was held.
Why the position is built at the time of the transaction
Assessments take place one to several years after the funds move. By then, bank statements of relatives may be hard to obtain, donors may be unavailable and the reason for holding cash may be forgotten. Data from the Annual Information Statement (AIS) and statements of financial transactions means that large deposits, capital contributions and property purchases are visible to the department from the outset. Recording the source at the time, with a short note and supporting documents in the file, is the most effective safeguard.
Frequently Asked Questions on Capital Introduction and Source of Funds
Can capital introduced by a proprietor be taxed as income?
Yes. If the proprietor cannot explain the nature and source of the capital, it can be taxed under Section 68 of the 1961 Act, now Section 102 of the Income-tax Act, 2025, at the special rate of 60% plus surcharge and cess.
What is the new section for Section 68 and Section 69A under the Income-tax Act, 2025?
Section 68 corresponds to Section 102 and Section 69A corresponds to Section 104 of the Income-tax Act, 2025, which applies from Tax Year 2026-27.
Are cash deposits from past withdrawals accepted?
They can be, if the withdrawals are proved and there is no evidence the cash was spent elsewhere. Long gaps between withdrawal and deposit, without an explanation for holding cash, often lead to rejection.
Is a gift from a parent taxable?
A gift from a relative is exempt, but the recipient must still prove the donor's identity, capacity and the genuineness of the gift. An unproved gift can be taxed as unexplained money.
What is the effective tax rate on unexplained income?
The tax is 60% plus 25% surcharge and 4% cess, an effective rate of 78%, under Section 115BBE of the 1961 Act, now Section 195 of the 2025 Act.
Who bears the burden of proof for unexplained credits?
The taxpayer. The Supreme Court has held that the taxpayer must explain the nature and source of the sum credited in its books.
Conclusion
Income-tax law does not question whether money belongs to a person; it questions whether its history can be shown. Savings, withdrawals, gifts and loans are all valid sources, but each must be supported by dates, amounts and documents that link it to the credit.
With the provisions now renumbered as Sections 102 to 105 of the Income-tax Act, 2025 and the tax rate unchanged at 60% plus surcharge and cess, the practical lesson remains the same: when money enters the books, its source should be documented at that time.
This article is intended for general information and knowledge sharing only and does not constitute professional advice or solicitation of any kind. Provisions are summarised as of September 2026. Readers should refer to the relevant provisions, regulations and judicial pronouncements for their specific facts.