Do I have to pay income tax if my friend uses my bank account to transfer funds to a third party?
Suppose my friend has to transfer to someone a big amount using debit card. Since he doesn't have a debit card, he transferred the same amount to my bank account via cash and asked me to make transaction using my debit card.
I made the payment for him using my debit card once the amount got credited to my bank account.
Since that amount is shown as credit in my bank statement, do I have to pay tax for it? Also, Are there chances that it can cause tax problem in future?
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It is generally best to avoid such situations.
Any credits to your accounts need to be explained to tax authorities whenever they enquire.
This cannot be treated as income as you did not work in exchange for the amount.
It can be treated by tax authorities as GIFT. Gift upto certain amount is tax free. Beyond the amount its taxable. Gifts from close relatives has not amount limit and is tax free.
Whenever the scrutiny happens, if you can convince the tax authorities that the action was more for convenience, it maybe fine.
In THEORY, you don't have to pay income tax in such a situation.
In actual fact, the transaction looks suspicious because the money went into your account.
Presumably, the money should have gone OUT of your account in equal amount.
Having allowed all this to happen, what you need to do is to DOCUMENT this activity ASAP.
The first thing to do is to retain the paperwork showing the sending of the funds to the third party. The second thing to do is to ask your friend for a letter dated TODAY (don't use an earlier date) as to why the money was delivered into your account, and corroborating the fact that it was sent to the third party.
Then if the IRS comes calling, you will have documentation to prove your point and protect yourself.
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