A 50-day window was given to holders of the old currency to deposit in their bank accounts. But the penal tax provisions were deterring many.
Sources said the government was keen to tax all unaccounted money deposited in bank accounts after it allowed the banned currency to be deposited in bank accounts during a 50-day window from November 10 to December 30.
There have been various statements on behalf of the government ever since the demonetisation scheme was announced on November 8, which has led to fears of the taxman coming down heavily on suspicious deposits that could be made to launder black money.
Officials have even talked of a 30 per cent tax plus a 200 per cent penalty on top of a possible prosecution in cases where black money holders took advantage of the 50-day window for depositing the banned currency.
Sources said the government plans to bring an amendment to the Income Tax Act during the current winter session of Parliament to levy a tax that will be higher than 45 per cent tax and penalty charged on black money disclosed in the one-time Income Disclosure Scheme that ended on September 30.
As for those black money holders who did not utilise the window, they would be charged a higher rate which could be close to 60 per cent that the foreign black money holder had paid in 2015.
Sources said the government is keen to root out benami deposits, particularly in Jan Dhan accounts.
There was also talk of the government imposing a limit on domestic gold holding, but it is not clear if the proposal was discussed at the Cabinet meeting chaired by Prime Minister Narendra Modi on Thursday night.
The Cabinet meeting, summoned at a very short notice, comes amid reports of high tax penalty terrifying people from putting their cash savings in the formal banking system.
The sources said the government wants all of the Rs. 500 and Rs. 1,000 banknotes to be deposited and not burnt or destroyed for the fear of penal action.
The Income Tax Department had previously warned that cash deposits above Rs. 2.5 lakh threshold post demonetisation decision could attract tax plus a 200 per cent penalty in case of income mismatch.
It was stated that the department was tracking all cash deposited during the period of November 10 to December 30, 2016, above a threshold of Rs. 2.5 lakh in every account.
This had instilled fear in people with reports of the banned currency even being destroyed.