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”
