What is income tax and who has to pay it?
Every person who makes more money than a certain amount has to pay tax in India. One of the many types of taxes is income tax. Income tax is the amount of tax a person pays depending on how much money they earn.
Demonetisation is a process that the government uses to check whether people have paid the correct amount of income tax. It is illegal to pay less than the correct amount of income tax.
What happens during a demonetisation?
When demonetisation happens, the government stops the use of some currency notes. They cannot be used to make any purchases. To use this money again, these old notes have to be exchanged with new ones given by the government. The government keeps a track of how much money a person exchanges. This helps the government to identify people who are exchanging more money than the money on which they have paid income tax. The government may ask such people questions on why they did not pay the correct amount of income tax.
When did the recent demonetisation take place?
On 8 November 2016, Narendra Modi, Prime Minister of India, announced that the currency notes of Rs. 500 and Rs. 1,000 would be demonetised from midnight. People could exchange these notes with new notes of Rs. 500 and Rs. 2,000. Further, people who had money on which tax had not been paid would be fined 200% of the tax.
What was the impact of the recent demonetisation?
People rushed to banks and post offices where currency notes could be exchanged. People often stood outside banks for hours waiting to exchange their old notes. Since physical notes were unavailable due to high demand, the demonetisation also led to a growth of electronic payment methods.
