Unexplained Cash Credits, Investment and Expenditure: How They Are Taxed (Income Tax Act 2025)

When a sum shows up in your books, an investment or asset is not recorded, or you spend money and cannot say where it came from, the Income Tax Act 2025 can treat that amount as your income. This is done by sections 102 to 106, and the tax is charged under section 195 at 30%, with no deduction or loss set-off against that income. The examples in this guide use tax year 2026-27, and the law is as amended by the Finance Act, 2026.

The five sections work the same way. Something unusual appears, the Assessing Officer (AO) asks for the nature and source, and if you give no explanation or one the AO finds unsatisfactory, the amount becomes income of that tax year. This guide covers each section, the special tests for loans and company share capital, the tax rate, and what to keep on file.

What are sections 102 to 106 of the Income Tax Act 2025?

Section	What triggers it	Amount treated as income	Tax year it falls in
102	A sum credited in your books with no explanation, or an unsatisfactory one	The sum credited	The tax year of the books
103	An investment not recorded in your books, or more than what is recorded	The investment, or the excess over the books	The tax year of the investment
104	An asset owned by you that is not recorded, or spending on it exceeds the books	The value of the asset, or the excess amount	The tax year in which the asset is found
105	Expenditure with no explained source, or an unsatisfactory one	The expenditure or the unexplained part	The tax year of the expenditure
106	Money borrowed or repaid by a negotiable instrument or hundi that is not an account payee cheque, or another mode the Board specifies	The amount borrowed or repaid, including interest paid	The tax year of the borrowing or repayment

Section 107 then says all five are charged to tax as per section 195.

What is an unexplained cash credit under section 102?

Section 102(1) applies when a sum is found credited in your books for a tax year and either you offer no explanation of its nature and source, or the AO finds your explanation not satisfactory. The sum is then charged as your income of that tax year.

The section says "sum credited in the books", so it is not limited to cash. A bank receipt, a loan entry, a customer advance or a capital introduction recorded in the books can all be examined.

Why are loans and share capital treated more strictly?

Two sub-sections add a second test. Your explanation is deemed not satisfactory unless the lender or investor also explains and the AO finds that explanation satisfactory.

• Loans and borrowings (section 102(2)): the person in whose name the credit is recorded must also explain the nature and source, and the AO must find it satisfactory.
• Share application money, share capital and share premium (section 102(3)): this applies to a company in which the public are not substantially interested. The investor must be a resident, must also explain the nature and source, and the AO must find it satisfactory.
• Exception (section 102(4)): sub-sections (2) and (3) do not apply when the person in whose name the sum is recorded is a venture capital fund or venture capital company referred to in Schedule V (Table: Sl. No. 6).

Does section 102 apply if I keep no books, or the money is not in the books?

Section 102(1) is worded around a sum "credited in the books of an assessee maintained for any tax year". It starts from an entry in your books. Where money or another asset is found with you but is not recorded in your books, section 104 is the one that speaks to it, and it names money in its definition of asset (section 104(2)). The explanation asked for is the same in both: the nature and source.

So a bank deposit or loan receipt is safest explained before it is booked. Keep the bank statement, the lender's or investor's confirmation, and a note of the source for each large credit, because the AO can ask for them one entry at a time.

What is unexplained investment under section 103?

Section 103 applies when you make an investment in a tax year that is not recorded in your books of account for any source of income, or the AO finds the investment is more than what the books show. If you give no explanation, or an unsatisfactory one, the value of the investment (or only the excess over the books) is deemed your income of that tax year.

What is an unexplained asset under section 104?

Section 104 is the asset version. It applies when an asset is found to be owned by you but is not recorded in your books, or the amount spent acquiring it is more than the books show. Here, "asset" includes money, bullion, jewellery, virtual digital asset or other valuable article (section 104(2)).

The deemed income falls in the tax year in which the asset is found to be yours, not the year it was bought.

What is unexplained expenditure under section 105?

Section 105(1) applies when you have incurred expenditure in a tax year and you offer no explanation of its source (or of part of it), or the AO finds the explanation unsatisfactory. The expenditure, or the part of it, is deemed your income for that tax year. Section 105(2) adds that this deemed income cannot then be claimed as a deduction under the Act.

What does section 106 say about borrowing or repaying through hundi or non-account-payee cheques?

Section 106(1) applies when any amount, including interest, is borrowed or repaid through a negotiable instrument or on a hundi, other than an account payee cheque or another mode the Board specifies. The amount borrowed or repaid, including interest paid on the borrowed amount, is deemed the income of the person borrowing or repaying, for the tax year of the borrowing or repayment.

Section 106(2) prevents double counting. If the borrowed amount has been deemed income of a person, that person is not assessed again on the same amount under section 106(1) when it is repaid.

The files I worked from do not say which other modes the Board has specified, so check the current notification before relying on a mode.

What is the tax rate on unexplained income under section 195?

Section 195(1) sets the tax payable as the sum of two parts:

1. tax at 30% on the income covered by sections 102 to 106; and
2. tax on the rest of your total income, calculated as if the deemed income had been removed from it.

Section 195(2) says no deduction for any expenditure or allowance, and no set-off of any loss, is allowed against this income. The rule applies whether the income is already shown in your return under section 263 (clause (a)) or is determined by the AO (clause (b)).

The 30% figure was substituted for 60% by the Finance Act, 2026, effective 1 April 2026. The figures here are before any surcharge or cess, which this guide does not cover.

Is there still a penalty on this income?

Section 443 used to allow a penalty of 10% of the tax payable under section 195(1)(i) on this income. The Finance Act, 2026 omitted that section with effect from 1 April 2026, so the text I checked has no penalty under it for tax years from 2026-27. Other consequences of an assessment, such as interest, are not covered here.

How much tax is payable? Two worked examples (tax year 2026-27)

	Example 1: unexplained investment (s.103)	Example 2: unexplained expenditure (s.105)
Facts	Ravi buys a plot for Rs 18,00,000. His books record only Rs 12,00,000 against it.	Meena spends Rs 3,50,000 on a family event. She can show sources for only Rs 2,00,000.
Unexplained amount	18,00,000 - 12,00,000 = Rs 6,00,000 (excess over books)	3,50,000 - 2,00,000 = Rs 1,50,000
Deemed income	Rs 6,00,000 of tax year 2026-27	Rs 1,50,000 of tax year 2026-27
Tax at 30% (s.195(1)(i))	6,00,000 x 30% = Rs 1,80,000	1,50,000 x 30% = Rs 45,000
Deductions or loss set-off?	None (s.195(2))	None, and the Rs 1,50,000 is not deductible (s.105(2), s.195(2))
Rest of income	Taxed separately as if the deemed income were not part of total income (s.195(1)(ii))

Assumptions: no explanation accepted for the shortfall, and surcharge and cess are ignored.

Example 3: a loan credited in the books (s.102(2))

Assumptions: tax year 2026-27, a trader, Rs 5,00,000 credited as a loan from "Suresh".

1. The trader explains the loan came from Suresh and shows the entry. Suresh does not respond to the AO.
2. Under section 102(2) the trader's explanation is deemed not satisfactory, because the person in whose name the credit stands has not explained it.
3. Rs 5,00,000 is charged as income under section 102(1).
4. Tax at 30% = 5,00,000 x 30% = Rs 1,50,000, plus tax on the rest of the income.

Real-life scenarios

Ravi and the unrecorded jewellery. A search finds 400 grams of gold jewellery at Ravi's house. His books show none, and he cannot say how he got it. Under section 104, the value of the jewellery is deemed his income of the tax year in which it was found, taxed at 30%. If he can show it was inherited or bought from recorded income, the explanation may satisfy the AO and nothing is added.

Meena's family loan. Meena runs a small shop and takes Rs 2,00,000 from her uncle. The uncle pays her by account payee cheque and signs a short confirmation with his bank details and income source. Both parts of the section 102(2) test can be met. Had the money moved by a bearer cheque, section 106 could also apply and the amount borrowed could be deemed income of the borrower.

Ravi repays through a hundi. Ravi borrowed Rs 3,00,000 from a lender and repays Rs 3,30,000 (including Rs 30,000 interest) by a non-account-payee instrument. Under section 106(1) the amount repaid, including the Rs 30,000 interest, is deemed income for the tax year of repayment. If the original Rs 3,00,000 had already been deemed income when it was borrowed, section 106(2) says he is not assessed on that amount again at repayment.

What are the common mistakes?

• Relying only on your own explanation for a loan. Section 102(2) needs the lender to explain too, so confirmations, PAN and bank statements from the lender matter.
• Leaving purchases out of the books. Section 103 and 104 apply to what is not recorded, so recording the asset and its funding source is the first defence.
• Paying or repaying by bearer cheque or hundi. Section 106 looks at the mode, and an account payee cheque is the safe mode named in the section.
• Expecting to deduct expenses against the deemed income. Section 195(2) bars deductions and set-off of losses, so an expense or a brought-forward loss cannot reduce it.
• Ignoring the year in which the asset is found. Under section 104, the income falls in the year the asset is found, which can differ from the year it was acquired.

Quick reference

Point	Rule	Source
Tax rate on deemed income	30%	Section 195(1)(i)
Deductions and loss set-off	Not allowed	Section 195(2)
Loan credit test	Lender must also explain, AO must be satisfied	Section 102(2)
Share capital test	Resident investor must explain, closely held company	Section 102(3)
Venture capital fund exception	Tests in 102(2) and (3) do not apply	Section 102(4)
Asset includes	Money, bullion, jewellery, VDA, valuable article	Section 104(2)
Penalty under old section 443	Omitted from 1 April 2026	Finance Act, 2026

Where this is in the Act

• Section 102: unexplained credits
• Section 103: unexplained investment
• Section 104: unexplained asset
• Section 105: unexplained expenditure
• Section 106: amount borrowed or repaid through negotiable instrument, hundi, etc.
• Section 107: charge of tax; Section 195: tax on income referred to in sections 102 to 106
• Section 293(6)(b): sections 102 to 105 also apply, so far as may be, in computing undisclosed income of a block period

Related guide: TDS on rent under the Income Tax Act 2025.

For a CA firm, the practical work is collecting the lender confirmations, bank statements and asset records before a notice arrives, then keeping them with the right client. Finexo's practice management software helps you track client documents and notice deadlines in one place. It does not decide whether an explanation will satisfy an AO. This guide is information, not tax advice.