If you’ve ever had to file your Income Tax Return, chances are you’ve stumbled across something called Section 68 of the Income Tax Act — and if it gave you a mini heart attack, you’re not alone.
At Finaccle Advisory, we often hear people ask, “What exactly is this section?” or “Why did I get a notice under it?” So, instead of hitting you with complicated definitions, let’s break it down in plain English. This guide is your go-to on what Section 68 means, when it applies, how it can affect you, and how to stay out of tax trouble.
What Is Section 68 of the Income Tax Act?
In the simplest words, Section 68 kicks in when there’s money in your bank or business books that you can’t explain properly.
For example, say there’s ₹8 lakh credited to your account and you have no solid paperwork to back up where it came from. Maybe it was a “friend’s loan” or an “investment” — but unless you can prove that, the tax department might treat it as your undisclosed income.
It doesn’t matter if you’re a business owner, salaried individual, or even a freelancer — if there’s unexplained money, Section 68 could come knocking.
When Does Section 68 Apply?
This section gets activated when:
- You receive a loan, gift, share capital, or even just cash deposits that aren’t backed by proper documents.
- The tax department finds inconsistencies during your Income Tax Return filing.
- You’re unable to provide basic details like who sent the money, why they sent it, and whether they could afford to.
If you’re a business owner and raising funds, especially for a startup — this is where you need to be extra careful. Finaccle Advisory often helps new businesses maintain their records properly to avoid such scrutiny.
What You Need to Prove (and How to Stay Safe)
When the Income Tax Department questions a credit under Section 68, they’re essentially asking you to prove three key things about the money that came in:
1. The Identity of the Person:
You need to show who gave you the money. This usually means sharing their PAN, Aadhaar, or any other valid identification. The idea is to make sure this wasn’t just some made-up name to park money under.
2. The Genuineness of the Transaction:
Just saying “my friend lent it to me” isn’t enough. You need to provide proof that the transaction actually happened — like a written loan agreement, bank transfer proof, or even email or WhatsApp messages that show communication about the transfer.
3. The Creditworthiness of the Person:
This is where many people get stuck. You also have to prove that the person who gave you the money had the capacity to do so. That could mean showing their Income Tax Return, salary slips, or bank statements. If someone with no income is suddenly giving you ₹5 lakh as a loan or gift, it’s a red flag.
At Finaccle Advisory, we help clients collect and organize these documents ahead of time — not when they’re already in trouble. It’s all about being one step ahead of the system and filing your returns with confidence.
Latest Orders on Section 68 of Income Tax Act
Over the past couple of years, the tax department and courts have become super strict about unexplained credits. Here are some cases that made headlines:
1. NRA Iron & Steel Pvt. Ltd. vs CIT
The Supreme Court said just submitting PAN or ITR isn’t enough. You need to prove that the person giving you money had the means and that the transaction was real.
2. Aditya Birla Telecom Case (2024)
Even big corporate players aren’t immune — if there’s no business logic or paper trail, it could still fall under Section 68.
3. XYZ Pvt. Ltd. (Tribunal, 2025)
A reminder that just calling an amount “investment” or “loan” doesn’t cut it anymore. You need the full package: bank records, agreements, and even investor ITRs.
Tax Rate Under Section 68
So, what happens if the tax department treats your unexplained credit as income?
Let’s just say… it’s not pretty.
As per Section 115BBE, unexplained credits are taxed at 78%, including surcharge and cess. That’s right — almost 80% of the amount gets taxed.
And that’s why we always advise our clients at Finaccle Advisory to never ignore documentation, even for small transactions.
Section 68 of Income Tax Act Penalty
Apart from that monstrous tax rate, you could also face penalties:
- Under Section 270A, you may be hit with 200% of the tax amount if it’s classified as misreporting.
- In some serious cases, criminal proceedings under Section 276C can even lead to jail time.
Let’s be honest — that’s way too much stress just because someone didn’t put a loan agreement in writing, right?
Why Income Tax Return Filing Isn’t Enough
Here’s a common myth: “But I’ve filed my return on time — I should be safe!”
Not exactly. Filing your ITR is great, but if the return contains suspicious credits, and you can’t back them up with proof, you could still get into trouble.
That’s why we say Income Tax Return filing is step one — but proper documentation is what actually protects you.
Common Mistakes That Lead to Section 68 Notices
- Taking loans from friends/family without paperwork
- Depositing large cash amounts without bank source
- Accepting investments without share valuation
- Claiming “gifts” but not having a gift deed
Avoid these, and you’re already miles ahead.
Startups and Share Capital Under Section 68
Startups are under increasing scrutiny for their share capital transactions. If you’re raising funds:
- Ensure investors have filed their Income Tax Returns
- Submit valuation reports to justify share premiums
- Maintain ROC compliance (Form 2, Form 3, etc.)
Even one wrongly documented investor can attract a Section 68 query — and that could snowball quickly.
Checklist to Avoid Section 68 Notices
Here’s a handy little list:
- Always get a loan agreement/gift deed
- Ask for bank statements or ITRs from lenders/investors
- File your Income Tax Returns on time
- Keep everything in writing (even if it’s from your cousin!)
How to Respond to a Notice Under Section 68?
If you receive a notice under Section 68, take it seriously:
- Understand the Notice – Read the queries carefully.
- Collect Evidence – Compile bank statements, ITRs of investors/lenders, contracts.
- Consult a Tax Professional – Let them draft a comprehensive reply.
- Reply Promptly – Delays can escalate the issue.
Proactive response is the key to closing Section 68 notices without damage.
Why Individuals Need to Care Too
Section 68 doesn’t just affect companies. Individuals are also liable if:
- They deposit large cash amounts in their accounts without proof.
- Receive gifts or loans without proper documentation.
- Their Income Tax Return filing shows credits that can’t be explained.
If you fall into any of these, you could face Section 68 action too.
Conclusion:
Section 68 might sound scary, but it’s all about transparency. If your money trails are clean, documented, and filed right — you’ve got nothing to worry about.
And if you’re ever unsure, don’t try to wing it. Reach out to experts who’ve been through it all. At Finaccle Advisory, we specialize in Income Tax Return filing, startup compliance, and defense against notices like Section 68 — all with a human approach.
