Ten common mistakes that can fetch you a tax notice
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1. Not reporting interest
income
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believed that interest income of up to Rs 10,000 a
year is tax free. Actually, the tax
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exemption of Rs 10,000 a year under Sec 80TTA applies only to the
interest
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earned on the balance in a savings bank account.
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Another 6% of the respondents believed that no tax
is payable if their bank has
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deducted TDS. These taxpayers don't realise that
TDS is only 10% of the income.
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If they fall in a higher tax slab, their liability
would be higher. In our survey, almost
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50% of the respondents who got this wrong have an
annual income of over Rs 10
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lakh. They pay 10% TDS even though they are supposed to shell out 30%.
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Interest income often goes unreported in tax
returns. In recent years, new rules have been introduced to plug this leak.
Till two years ago, TDS kicked in when the interest from deposits made in one
bank branch exceeded Rs 10,000 in a financial year. Investors used to split
their deposits across bank branches to avoid TDS. Now TDS applies if the
combined income from deposits in all branches of a bank exceeds the threshold.
What's more, TDS also applies to recurring deposits now.
In future, as banks start sharing data, TDS
could be applied to deposits made across other banks as well. "The
mechanism to track deposits across other banks already exists. If banks share
the names and PANs of fixed deposit investors, lakhs of individuals could come
in the tax net," says M.K. Agrawal, Senior Partner, Mahesh K Agarwal &
Co.
Smart tip: Calculate how much interest you will get
on your FDs, RDs and other fixed income investments and add that to your
income.
2. Ignoring income of old job
Every time an individual switches jobs , he is in
danger of falling foul of the tax laws. This is because the new employer
doesn't take into account the income earned from the previous job and offers
tax exemption and deduction to the employee all over again. Instead of Rs 2.5
lakh basic exemption and Rs 1.5 lakh deduction for tax saving investments under
Section 80C, he gets Rs 5 lakh basic exemption and Rs 3 lakh deduction.
Obviously, he will be paying much less tax than he ought to.
But
this discrepancy won't remain hidden for long and would eventually be
discovered when the taxpayer files his return. The incomes in the two Form 16s
would be added but he would get basic exemption and deduction only once. This
also means a large tax payment at the time of filing returns because the
duplicate benefits would be rolled back. The last date for paying the tax is 15
March. After this, if the unpaid tax exceeds Rs 10,000, there is a penal
interest of 1% per month of delay. "The employee will have to pay the
balance tax along with interest at the rate of 1% per month for delay,"
says Vaibhav Sankla, Director, H&R Block.
This is a common problem faced by people who switch jobs
without keeping an eye on their taxes. They are saddled with a huge tax
liability when they sit down to file their tax returns in June-July.
Don't think you can get away by not mentioning
the income from the previous employer in your return. If some tax has been
deducted on the income from the first employer, it will be reflected in your
Form 26AS. So if you don't report that income, the discrepancy will immediately
get picked up by the computerised scrutiny system and you will get a tax
notice.
Smart tip: Inform your new employer about income
from previous job so that the TDS is cut accordingly.
3. Not filing tax returns
A lot of taxpayers, especially senior citizens
such as Kapoor's mother, have received notices for not filing their tax
returns. Anybody with an income above the basic exemption is liable to file his
tax return. The basic exemption is Rs 2.5 lakh per year for people below 60, Rs
3 lakh for senior citizens above 60 and Rs 5 lakh for very senior citizens
above 80. The rest of us , including
NRIs, have to comply.
Keep in mind that this is the gross income
before any deductions and tax breaks. If your annual income is Rs 4.2 lakh and
you invest Rs 1.5 lakh under Sec 80C, your tax will come down to zero. But you
are still liable to file your tax return. Similarly, even if all your taxes are
paid, you still need to file the return.
For a lot of people, confusion stems from a rule
introduced four years ago, where salaried individuals with an income of up to
Rs 5 lakh a year were exempted from filing returns. However, that rule has long
been withdrawn. "Although the regulation was applicable only to that particular
financial year, many people tend to still follow it," says Archit Gupta,
Founder and CEO of Cleartax.in.
Not
filing returns is not a very serious offence if all your taxes are paid. You
will only get a notice asking you to do the needful. The tax laws allow a
taxpayer to file delayed returns even after the due date has passed. But if you
have unpaid taxes, be ready to pay interest as well as a penalty of up to Rs
5,000.
Smart tip: Don't miss filing your return even if
your tax is zero or all your taxes are paid. File online to avoid mistakes.
4. Tax sops on house sold before 5 years
The government offers generous tax benefits to
those who buy houses on loans. But if the buyer turns into a seller too early,
some of these benefits are rolled back. If you sell the house within five
years, the tax benefits availed of under Sec 80C for the principal repayment will
get reversed.
This could mean a heavy tax liability if you
have claimed deduction for the principal repayment of the home loan under Sec
80C. You won't be able to keep this under wraps because the buyer may seek tax
benefits on the same property. However, the deduction for the interest on the
home loan under Sec 24 will not be rolled back.
Similarly, if you have ended a life insurance policy within three years of purchase, any tax
deduction availed on the policy will be reversed. Not many taxpayers are aware
of this rule about insurance policies. "No taxpayer is so honest as to
report this in his ITR and pay additional tax for the previous years,"
says a chartered accountant.
Smart tip: Wait for at least five years before
selling a house or three years before ending a life insurance policy.
5. Misusing forms 15G, 15H to avoid TDS
As mentioned earlier, many investors try to
avoid TDS by splitting their investments across different banks. Many others
submit Form 15G or 15H so that their bank does not deduct TDS. These forms are
declarations that the individual's income for the year is below the taxable
limit and therefore no TDS should be deducted from the interest.
However, misuse of these forms is a serious
offence. "A false declaration not only attracts penalty but also
prosecution. The taxpayer can be sentenced to jail for terms ranging from three
months to two years," says Sudhir Kaushik, Co-founder and CFO, Taxspanner.com.
This doesn't stop people from blindly filling the forms to escape TDS.
You need to
meet two basic conditions to file form 15G. One, your taxable income
for the year should not exceed the basic
exemption of Rs 2.5 lakh. Two, the total interest received during the financial
year should not exceed the basic exemption slab of Rs 2.5 lakh. "The total
interest income includes interest from other sources as well, including PPF,
NSCs and not just interest income from deposits," says Sankla of H&R
Block. Form 15H, which is for senior taxpayers above 60, imposes only the first
condition. The final tax on the total annual income should be nil. So, senior
citizens whose taxable income is below the Rs 3 lakh limit are eligible to file
Form 15H. For very senior citizens above 80, this limit is Rs 5 lakh.
Though this is a standard practice, and
investors take it lightly, don't assume that the Form 15G and 15H will not get
noticed by the taxman. "If TDS is not deducted because the person has
filed Form 15G or 15H, it is separately shown in part A1 of the Form
26AS," cautions Gupta of Cleartax.in.
Smart tip: File Forms 15G only if you fulfill
both the conditions. TDS is an interim tax and you can claim a refund if you
have paid more than due.
6. Not deducting TDS when buying property
Given
that real estate investments involve a lot of unaccounted money,
the government has extended the scope of TDS to property transactions as well.
If you buy a house worth more than Rs 50 lakh, you have to deduct 1% TDS from
the payment to the seller. In case the seller is an NRI , the TDS will
be higher at 30%. This amount should be deposited with the government on behalf
of the seller using Form 26QB. Delhibased Sahay had no idea of this rule when
he bought a property in Noida last year. He
now has to respond to a tax notice, and could even be slapped with a penalty of
up to Rs 1 lakh.
The rule is applicable even if you pay in
instalments. In such cases, the TDS needs to be deducted from each payment and
the money deposited with the government within seven days.
While TDS deduction happens automatically when
you buy a new property from a builder, in case of transactions between
individuals, it is often ignored. Like Sahay, most buyers are unaware of the
rule. Even if they are aware, they are not sure how to calculate the tax.
"The TDS has to be calculated on the total sale price and not just the
amount exceeding Rs 50 lakh. Many make this calculation error," says
Gupta. The total sale price is the amount payable and as registered in the sale
agreement. It does not include stamp duty and brokerage.
Also, only the sale price has to be taken into
consideration, not the circle rate of the property. If a property is valued at
Rs 60 lakh based on the circle rate, but gets sold for less than Rs 50 lakh,
the buyer need not deduct TDS.
Smart tip: Make it clear to the seller that you
will be deducting 1% TDS from the payment. Make sure you have his correct PAN
details.
7. Not reporting foreign assets
We usually don't want to be alarmist but this is
one area where taxpayers need to tread with caution. They can no longer afford
to be unsure about their foreign income and assets. "There is a lot of
exchange of information between countries and we will see an exponential rise
in the number of notices being sent to taxpayers on this account," says
Tapati Ghose, Partner, Deloitte Haskins & Sells LLP.
Mis-reporting
overseas assets will not be taken lightly by the government. You
could be prosecuted under the Black Money Act
and the penalty can be as high as Rs 10 lakh for even small errors. Experts say
taxpayers who have worked abroad often go wrong when reporting their foreign
assets. "The employee stock options is often acquired at no cost or be
sold out during the year and therefore get missed when you take an account of
your assets. Capital assets like jewellery often skips the mind as they do not
generate any income. In fact, they may have been bought only as
ornaments," says Ghose.
Not
just salary and perks, freelancers who receive money from foreign clients need
to report this income under the foreign assets schedule. "This should also
include gifts, which are deemed to be income," says Ghose. Also, all
foreign bank accounts—whether operational or not and even with a tiny balance—need
to be reported. You even have to report bank accounts where you are merely a
signing authority.
Smart tip: Start collecting details of your
foreign assets much before the last date for filing returns.
8. Disregarding clubbing provisions
It's
quite common for taxpayers to invest in the name of non-working spouses or
minor children. But though gifts made to a spouse or a minor child do not
attract tax, if that money is invested the income it generates is clubbed with
the income of the giver and taxed accordingly. So, if you bought a house in
your wife's name, any income from that house, whether as capital gains when you
sell it or as rent, will be treated as your income.
Similarly, if a husband has invested in fixed
deposits in the name of his wife, the interest will be taxed as his income.
"It doesn't matter whether your spouse's income is below the basic
exemption. the income from the investment will get clubbed to your
income," says ghose of deloitte.
The rules are slightly different in case of
investments in the name of minor children (below 18 years). The earnings are treated as the income of the parent who
earns more. However, the taxman has softened the tax blow by extending an
exemption of Rs 1,500 a year per child up to a maximum of two children.
Parents
who want to invest in the name of their children can go for tax-free options
such as the Sukanya Samriddhi Yojana, PPF or tax-free bonds. Though the income
will get clubbed, there will be no tax implication. Mutual funds also help bypass the clubbing provision because
the tax liability is deferred indefinitely. If the child withdraws after 18,
that income is his, not the parent's.
Smart
tip: Invest in tax-free options in spouse's name. Invest the income in FDs or
RDs. Income is clubbed but the income from income is not.
9. Not reporting tax-free income
This
may not be a serious offence but a taxpayer is required to mention tax-free
income in his return. Tax-free income includes interest earned on PPF, tax-free
bonds, life insurance policies, capital gains from stocks and equity-oriented
funds and gifts from specified relatives. "Even if you are not liable to
pay any tax on these incomes, all your interest income, including savings bank
interest, has to be reported in the ITR," says Gupta of Cleartax.in. The
taxpayer can then claim exemption for the same. While you may not receive a
notice for not mentioning tax-free income, it will certainly create an
inconsistency in your return.
This year's Budget has proposed a tax on dividend income if it
exceeds Rs 10 lakh. The new rule will impact HNIs who use dividend stripping
strategies to earn tax-free income.
Smart tip: Mention all tax-free income in your
ITR but claim exemption for it under various sections.
10. Spending, investing beyond means
We
all know that reckless spending is not good for our financial health . But few
people realise that spending too much can also lead to a tax notice. If your
expenses or cash withdrawals exceed certain limits, your credit card company and your bank are supposed to report
that to the tax department.
If these expenses are much beyond your reported
income, the income tax department may send you a notice or pick up your case
for scrutiny. "If cash transactions, including ATM withdrawals, exceed Rs
50 lakh in a year, a bank is supposed to report it," says Minal Agarwal,
Chartered Accountant and Partner, Mahesh K Agarwal & Company.
Similarly, if investments by an individual cross
certain thresholds, mutual funds, banks and brokerages are supposed to inform
the tax department. If you invest more than Rs 1 lakh in stocks, your broker
will squeal on you. Invest over Rs 2 lakh in a mutual fund and your name gets
into a list of high-value investors.
Buy
bonds worth over Rs 5 lakh and you get noticed. Even the purchase of gold,
which was till now a safe haven for unaccounted money, will require your PAN
card details. If these purchases and investments don't match your reported
income, be ready for a tax notice. "The government is gradually getting to
know all aspects of the individual's financial life," says Agarwal.
Smart tip: Avoid cash transactions as far as
possible. If depositing cash in bank account, keep record of source of cash.
Got a notice?
Take help from a tax expert
The first thing to do when you get a notice from
the tax department is not to panic. Many notices are simply tax demands or for
non-filing that can be dealt without a fuss. Only a scrutiny or reassessment
notice is reason for worry. In such matters it is best to take the help of a
qualified professional who knows how to respond to the notice. "Engaging a
specialist would push up the compliance cost but it would ensure that the
matter is skillfully handled. A chartered accountant would be better equipped
to handle the situation and provide apt responses," says a tax expert.
A new online tool launched by tax filing portal
Cleartax.in will be useful here. If you have got a tax notice, the portal will
help you resolve the case free of cost. All you have to do is quote your PAN
number and upload the PDF file of the tax notice.
The tax experts of Cleartax will examine the
case and send you an e-mail within 1-2 hours explaining the steps you need to
take.
If the notice relates to common issues such as
TDS claims, non-filing of tax returns or verification of documents, the issue
will be resolved within a day's time. "More complex issues will have to be
examined in detail and handled personally," says Archit Gupta, Founder and
CEO, ClearTax.in. If you need the further support from the site, you may have
to shell out an advisory fee ranging from Rs 800 to Rs 1,600 depending on the
complexity of the case.
Of late, the I-T department have been tightening
their scrutiny and sending notices to taxpayers for a plethora of reasons.
Apart from due taxes and penalties, the fines for not responding to these tax
notices can be as as high as Rs 10,000.
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