Return of the Income Declaration Scheme

Written by Ronak Pol
Published: 28th November 2016

The demonetization scheme which adversely hit the Indian informal economy was met today with a new income disclosure scheme called the “Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016″. This is not the first time that the government has introduced such a scheme, rather it is the second time this very year that the government came up with this scheme.

The previous scheme which came into effect on 1st June 2016, saw disclosure of cash and other assets with an aggregate collection of Rs. 65250 crore upto the midnight on 30th Sept 2016 (read the government circular). Although termed as a success by the government, it was far from a success story. But with demonetization in its full effect, the government has created the right set of incentives for people to take the second iteration of income declaration scheme more seriously and we can expect a lot more disclosure this time around.

What is the scheme?

Understanding the scheme itself is quite straightforward. The declarant under this regime shall be required to pay tax @ 30% of the undisclosed income, and penalty @10% of the undisclosed income. Further, a surcharge to be called ‘Pradhan Mantri Garib Kalyan Cess’ @33% of tax is also proposed to be levied. (totalling to approximately 50%)

In addition to tax, surcharge and penalty (totalling to approximately 50%), the declarant shall have to deposit 25% of undisclosed income in a Deposit Scheme to be notified by the RBI under the ‘Pradhan Mantri Garib Kalyan Deposit Scheme, 2016’. This amount is proposed to be utilised for the schemes of irrigation, housing, toilets, infrastructure, primary education, primary health, livelihood, etc.

Meaning of the other 50% – 25% of the money that remains after taxes will be available to the account holder and the other 25% will be used by the government for four years in a special new fund for welfare schemes that will be called the Pradhan Mantri Garib Kalyan Yojana. No interest will be paid to the owner for this. After four years the owner can reclaim his money (25%)

For example: If an individual declares 1000 rupees under the IDS, he will pay a tax + penalty of 500 rupees. Of the remaining 500 – he is appropriated 250 for direct use today and the remaining 250 after four years. In the intermediate period of 4 years, he will not receive any interest.

How will the defaulters be assessed

As reported by the Press Information Bureau,”The Taxation Laws (Second Amendment) Bill, 2016 (‘the Bill’) has been introduced in the Parliament to amend the provisions of the Act to ensure that defaulting assesses are subjected to tax at a higher rate and stringent penalty provision.”(read more)

Screen Shot 2016-11-28 at 9.58.26 PM.png

Circular by the Press Information Bureau, Government of India, Ministry of Finance

 How does this scheme affect the economy?

This scheme will be of particular interest to those who have huge sums of undisclosed money and in the past two weeks not found a way to launder it from within the system. But it not only affects them but also the government and rest of the country. If successful, the government will be able to unearth a substantial chunk of income for all the welfare schemes that they have planned for. This will create some breathing space for the Finance Minister when he drafts the next budget as he MIGHT have a surplus to play with.

The scheme will also generate a steady stream of flows for the government for the next four years through the 25% of the funds that they will hold.


In conclusion, it’s a welcome change, the government is looking to tap into those risk averse individuals who are looking to launder their money illegally. This scheme will help bring liquidity in the economy that will now be accounted for and provide the government with additional monetary space to carry out their welfare plans.

But still the idea that demonetization will end black money in India is not true and this scheme will not change that fact.


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