Missing in action - Notes of 500 & 1000

The recent announcement of ban of 500 and 1000 notes by the Government of India has paralyzed the entire nation. It has created panic in the consumer class and suddenly all round people are feeling the need to use paper money. People living on ATMs and bank withdrawals are left confused with no direction about step forward. Think about it if you hold just two notes in hand and both are no more legally valid for transactions. That’s what demonetization does to you.

What is demonetization of money?

Demonetization is process of stripping a particular currency unit as mode of exchange. It is declared to be no more valid for any exchange of goods and would hold zero value. This step is basically undertaken to curb inflation and help curb the non-accounted cash.  

Does it affect your personal cash flow?

     i.      The short term impact of this decision will affect our liquidity. There would be shortfall in currency supply. Also, a higher 2000 denomination note announced would not be useful for major of small income group people, who need to plan their home budget around these few thousands. Also, to purchase daily essential commodities, we need to shell out a few 100’s which are currently not easily available.

    ii.    The consumption level of people would come down in discretionary expenses. It would affect the business for local retailers, who have not adapted to utilization of online payment wallets or card payment mode. Petrol fuelling stations are major areas after lifestyle expenses, which come across as high cash expenses. for some time, fuel stations could see a fall in its collections until people prefer to refill for higher denominations.

   iii.   The situation of low supply of cash, would affect the equity market in short term as people feel it is a negative to be stripped from money.

  iv.  The cash payment has been majorly responsible for spiking up the real estate markets is expected to correct downwards with this change. People would think twice in future before stashing up cash at home.    

What should I do?

Every change is a lesson to be learned and remembered for future. The unplanned move has made it more mandatory for us to be cautious in our dealings with law:

a)   Don’t find ways to dodge law. If you have high surplus in cash it is better to bring it in legal purview and invest it to help it grow well.

b)   Taking over night decisions to cover one mistake is another grave and should be avoided. Buying gold or real estate to save your tax liability is not a wise decision. Such small thinking gives rise to imbalance in pricing and demand.

c)   Shortfall of cash is a temporary situation expected to last for a few days or months. If possible list down the necessary expenses and plan to spend in it first.

d)   Look around, you might find people who are unable to even meet their daily requirements. Help them in every possible ways.

How much cash can one hold in their hand/ home?

As per Income Tax Act, there is no maximum limit for the amount of cash one can have with himself. Some time ago, there was news to plug the circulating non account at home to 15 lakhs. However, there was no such official announcement made to this further. Liquid cash in foreign currency is defined under FEMA (Foreign Exchange Management Act) is limited to USD2,000.

Hence, what we should understand is that although there is no fixed amount of the maximum cash allowed, we need to be prepared in case of any query or income tax raid.  So how is the limit fixed for cash in hand:-

a)   Understand well the source of your cash, if it withdrawn from a bank, then it should be having a credit entry in your bank statement/ passbook. If it is a cash gift, unless it is small token of shagun, it is always handy to have a gift deed or documentary proof at your disposal. The tax should be paid on the withdrawn amount.

b)   The personal balance sheet should have a proper tally of all your income sources and expenses- including debit/credit cards. Try to highlight the big expenses so that you can easily identify them.

c)   Unless and until, you have planned a big purchase (not possible in non-cash way), it is necessary to avoid cash balances as it is troublesome as well as risky. As per contingency planning rule, you can divide your funds between savings account and home.

d)   For house wives or retired individuals, who don’t have taxable income (below Rs 2.5 lakhs below 60 years) and simply maintain cash at home to meet, their expenses would not be taxed. However, they need to declare the amount in their bank account once. Over the time, they can withdraw and use the same.

The most important point to be remembered is simply holding cash does not entirely amount to black money. If you have cash or undeclared asset, it is necessary to pay necessary tax on it and bring it in legal ambit. “Having cash balance does mean owning black money, but it gives rise to parallel economy, that hinders complete growth of economy”