Documenting the money trail

The phrase money trail is scary! It is often associated with investigations into financial crimes. However, I am using the same phrase but not related to investigation or crime. It has to do with our financial transaction management.

So, what exactly is a money trail in our context?

It involves tracing the sequence of money flow from its point of origin to its destination. Maybe an example will help to understand it better

Consider Mr. Arun, an NRI/OCI card holder, and the sequence of events in his financial transactions:

  1. Arun earns a salary in the USA
  2. The salary is deposited into his US bank account
  3. Later he files his Income Tax return with the IRS, USA
  4. Subsequently, he transfers a portion of his salary income to his Indian Bank Account (Say NRE Account)
  5. From the NRE Account, he transfers funds to SKT builders to purchase a flat in Bangalore.

So, what is the documentation of the money trail in this scenario?

  1. Employment Letter and Payslips from his US employer
  2. USA Bank statement reflecting the salary credited to his account
  3. Copy of his Income Tax Return (W2 Form or equivalent), Tax Residency Certificate (if you can obtain) filed in the USA
  4. Proof of wire transfer from US Bank account to Indian Bank Account
  5. NRE Bank Account Statement in India
  6. Receipt, Sale Agreement, Statement of Account from the builder confirming the transaction and payment.

Consider the above as a sample but additional relevant documents could enhance the documentation of the money trail!

Similarly, any significant financial transaction such as acquiring property (including money) through gift, WILL or inheritance, purchase and sale of property, vehicles, jewellery, mutual fund, stocks, etc., should be backed up by robust documentation. (In case you have a specific situation, write to me, I can guide you with the list of documents required for each such case)

Why is this documentation necessary?

The taxmen may demand details of financial transactions spanning the past ten years. In the event such a situation arises unless you substantiate the source of funds and flow of funds, the Tax Officer may not be satisfied! If the Officer is not fed with convincing proof, he will exercise his powers of levying taxes, interest and penalties. Only those who have undergone such ordeals will realize the pain! The process of proving innocence is not only financially draining and time-consuming, but is also mentally taxing!

Lastly, while the process of conducting transactions may be easy, the compilation and organization of requisite documents can be tedious and irritating! However, my experience says once you get used to compiling documents and arranging them sequentially, trust me, it is rewarding in terms of satisfaction.

It’s worth the effort, try it out!

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About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant in Bengaluru, India. He has 28+ years of experience in income tax, business setup, and NRI matters. He is also an Insolvency Professional, Registered Valuer (F&SA) and Social Auditor.Prasad welcomes your comments and questions. Please email him at simplifiedlaws20@gmail.com

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