5 Common Ways People Turn Black Money Into White Money

Black money is money that you don’t tell tax authorities about, and it is often hidden from official records. It’s earned in illegal ways or through methods where taxes are avoided, and over time, many people have found ways to turn black money into white money, which means money that is declared and taxed by the government.

This article looks at five common ways people in India try to change black money into white.

You will see how individuals in various industries attempt to “clean” income using clever but risky methods. While these techniques might seem like a quick solution, serious legal problems often follow.

The government works constantly to fight black money, and anyone trying to convert illegal funds faces heavy penalties.  Let’s take a closer look at five of these methods.

Way 1: The Jeweler Method

Many people use a common method to turn black money into white, involving a jeweler. In this process, individuals take black money to a jeweler and buy silver items or utensils worth the amount intended for legalization, and the jeweler provides a bill showing the sale of silver utensils.

Afterward, the jeweler issues a cheque in the buyer’s name for the same amount, minus a small fee of about 4%, and the buyer can deposit this cheque into a bank account.

When filing income tax returns, the buyer does not need to pay capital gains tax on this amount because silver utensils are considered “personal effects,” and the Income Tax Act does not apply capital gains tax on such sales. By buying silver items and receiving the cheque from the jeweler, black money is turned into white, as it is shown as a genuine transaction.

However, it is important to remember that the government is aware of such practices, and anyone caught doing this may face tax evasion charges, so it is always better to stay on the safe side when dealing with money matters.

Way 2: Using Section 51 of the Income Tax Act, 1961

Section 51 of the Income Tax Act, 1961, allows individuals to convert black money into white by adjusting certain transactions, enabling them to claim tax exemptions or deductions for specific capital assets, and one common method to achieve this is by investing in property.

For instance, if you have black money, you can invest it in property, and once the investment is made, you can later sell it and report the sale as a capital gain while paying the necessary taxes.

By paying taxes on the capital gain, you can ensure that the money becomes legal and transparent to the government, providing a clear record of the earnings. While this method is legal when done correctly, it’s crucial to follow the rules outlined by the Income Tax Act to avoid any penalties or legal complications.

Way 3: Gifts from Relatives

One way to convert black money into white money is by receiving gifts from close relatives, as gifts from family members are not taxed under the Indian Income Tax Act, but the relative giving the gift must have legally earned money (white money) that has been properly taxed. This ensures that the transaction remains within the legal framework.

For example, a person can ask a relative with a stable, legally declared income to gift an amount like Rs. 10 lakh, and the relative may give a cheque for the amount, which can then be deposited in the recipient’s bank account without any tax being applied. Since the gift is from a relative, the rules under Section 56(2)(vii) of the Income Tax Act, which apply to most gifts, do not apply here.

This method is popular because it doesn’t involve any direct tax for the recipient, but it does rely on the relative having legally earned, taxed money. However, if tax authorities suspect any wrongdoing, such as the relative not having actual taxable income, it could lead to trouble.

Way 4: Converting Black to White by Cheque – Section 68

Section 68 of the Income Tax Act, 1961, offers a legal way to convert black money into legitimate income by addressing unexplained credits in financial records, and it applies when business owners receive large cash deposits or cheques without proper documentation. If the source of the funds can be proven, the amount can be treated as legal income and converted into white money, which helps avoid potential issues with tax authorities.

For instance, a consultancy business once received a cheque payment of Rs. 20 lakh, and although there was concern about the missing documentation, once the necessary invoice and payment records were provided, the amount was quickly accepted as legitimate income. This highlights how Section 68 can be used effectively to convert unexplained credits into legitimate earnings, as long as proper evidence is presented.

Using Section 68 is a useful method for turning cash deposits into white money, but it only works if there is valid proof of the money’s origin. Tax authorities carefully scrutinize these claims to ensure the funds are not linked to illegal activities, such as money laundering.

Way 5: Showing Income in Cash as Professional Fees

One easy way to turn black money into white money is by showing it as income earned through professional fees, a method often used by doctors, consultants, and tutors, and if extra cash is earned from tuition fees or another profession, it can be declared as professional income, filed in tax returns, and taxed at the normal rate. This approach simplifies the process of making money “clean,” as it only requires paying tax on the earned income.

Although this method is straightforward, there is a risk of underreporting or making mistakes in the income report, so it is important to ensure that all income is declared correctly to avoid problems with tax authorities.

Additionally, keeping detailed records of all payments received is crucial to prevent any issues during tax audits and ensure everything is handled properly.

Conclusion

These five methods, though common in India, are just a few ways people try to change black money into white, often relying on legal and financial loopholes that can turn illegal earnings into taxable income, but tax authorities closely monitor these methods, and anyone caught breaking the law faces serious legal consequences. The government is working hard to improve transparency and enforce stricter tax laws to combat black money, aiming for better compliance, and anyone wanting to legally convert black money into white must go through the correct channels while following tax laws carefully to ensure full compliance with the rules.