People who make unexplained cash deposits of scrapped high-denomination bank notes before December 31 may have to pay 50% tax, along with a four-year lock in period for half of the remaining amount, under new government proposals.
Those who do not declare the unaccounted cash voluntarily could face a higher 90% tax and penalty.
The cabinet, which met Friday night, came up with the changes to the tax law to plug existing loopholes. The amendments will be tabled in parliament on Monday or Tuesday.
The news comes amid reports of a huge surge in deposits in Jan Dhan accounts across the country. Jan Dhan accounts were part of a 2014 drive by Prime Minister Narendra Modi to encourage millions of rural and urban poor to open bank basic accounts with simplified rules regarding proof of identity and address.
Authorities now suspect that the surge in deposits could be an attempt by black money hoarders to launder their unaccounted wealth by depositing it in the accounts of poor people.
Meanwhile, the government has also announced a number of new measures and relaxations on the usage of old currency notes.
Exchange of old notes for new ones was stopped with effect from Thursday midnight due to concerns over the cash supply with pay day approaching.
Although the demonetization has been promoted as a mammoth exercise to stop money laundering, counterfeiting and corruption, it has removed 86% of the total currency in circulation leading to cash crunch.
Anticipating the pay day rush, banks are planning to set up micro ATMs on their premises and allow partial withdrawal of salaries.
"All your banknote is belong to us."