If you forgot to include some income
or haven't declared certain assets, you may get a notice. Here's how you can
avoid getting one
Are you among the more than two
crore taxpayers who filed their returns be fore 31 July? These taxpayers can
rest easy because they filed by the due date. However, the dread of the taxman
does not end here. It is common for taxpayers to make errors or deliberately
conceal income in their returns, which could lead to notices from the tax
department. Nudged by the government to enhance revenue collections, the tax
authorities are on an overdrive to catch tax evaders. Not only are financial
transactions being tracked, but loopholes that allowed tax evasion are also
being plugged. In October 2013, the Central Board of Direct Taxes issued a new
rule for claiming HRA exemption. Salaried taxpayers claiming HRA exemption were
asked to report their landlord's PAN if the total rent in a year exceeded Rs.1
lakh. Earlier, if the total rent paid was less than Rs.15,000 a month, there
was no need to submit the landlord's PAN details.
Interest income
The declaration of interest income
is the most common mistake taxpayers make. The interest earned on bank fixed
deposits, recurring deposits and infrastructure bonds is fully taxable but many
taxpayers skip mentioning it in their tax return. Some think the newly
introduced exemption for bank interest makes this income tax-free. But the
exemption under Section 80TTA is only for the interest on your savings bank
balance. Interest from other sources, including 5-year tax saving bank FDs, is
fully taxable.
The other big fallacy is the TDS.
Banks deduct 10% TDS if the interest exceeds Rs.10,000 in a year. If the income
is below Rs.10,000 and TDS has not been deducted, you have to add the interest
to your total taxable income and accordingly pay tax. Even if TDS has been
deducted, it does not mean that your tax liability is taken care of. If you are
in the 20-30% tax bracket, you are required to pay more tax on the income. Don't
think you can get away by concealing this income. “Failure to report this is
tantamount to concealment of income. The tax authorities can easily detect it
as the bank has already deducted the TDS and reported the same along with your
PAN details,“ says Kirit Sanghvi, senior partner, K S Sanghvi & Co. Also,
in case of recurring deposits, no TDS is deducted, irrespective of the quantum
of the interest, but the interest income is still fully taxable. Similarly, the
interest earned on NSCs and infrastructure bonds is taxable.
Some taxpayers feel safe from the
prying eyes of the taxman if they put money in coperative banks. Till now,
interest from fixed deposits in cooperative banks was exempt from TDS. However,
there is a rude shock waiting for such taxpayers this year. The Karnataka
Income Tax Tribunal recently ruled that if the interest exceeded Rs.10,000 in a
year, it must be subjected to TDS. Following this, several cooperative banks
have received notices from the IT department asking them to deduct tax for the
year 2013-14.
Even the interest from tax-free
instruments, such as the PPF and tax-free bonds, has to be reported in your
return. However, this is not a serious transgression and the taxman won't come
after you
Clubbing income of minor child,
spouse
Your earning is not the only income
you need to declare. If you invested in the name of your minor child or gave
money to your spouse for investing, the income from such investments will also
be treated as your income. Any income of a minor child (below 18 years) is
clubbed with the income of the parent who earns more. There is a tiny deduction
of Rs.1,500 per child for up to two children in a year. Similarly, if you have
invested in your spouse's name, the income will be treated as your income and
taxed at the applicable rate. If you bought a house in your wife's name and
rented it out, the rent will be treated as your income, not hers, even if the
house is transferred to the wife as gift. “The entire income would have to be
included in the tax working of the original holder of the asset,“ says Kuldip
Kumar, executive director, PwC.
In rare cases, where the spouse is
given a remuneration for working in the taxpayer's business, the money given to
the spouse will not get clubbed. For instance, if your chartered accountant
wife maintains the accounts of your business and you pay her a remuneration
which she invests, the income will not be clubbed. But she should have the
required qualifications to do the work she is being paid for. “The onus is
squarely on the taxpayer. You should be able to prove that your spouse is hired
in a professional capacity, not otherwise,“ says Sandeep Shanbhag, director, Wonderland
Consultants.
Not filing tax return
This is another common mistake. Many
taxpayers believe that since their salary is subject to TDS, they don't have to
file returns. That's not true. If your income exceeds Rs.2 lakh, you have to
file your return. Even if the tax liability is reduced to zero after deduction
under Section 80C, the return has to be filed. The government has identified
the category of non-filers as a key one for tapping unpaid taxes. Last year,
the Income Tax Department sent 12 lakh notices for non-filing of taxes.
Non-filers are not the only ones who may get such a notice. Many taxpayers file
returns online but don't complete the process. For example, a taxpayer must
submit the ITR V to the Centralized Processing Centre in Bangalore within 120
days of uploading his return. “Until you submit the IT return to the
authorities physically and get the acknowledgment of receipt, the return is
treated as invalid,“ says Kaushik.
Not spending enough
The taxman also gets suspicious if
you are investing too much or withdrawing too little. A Mumbai-based individual
was asked to explain how she was sustaining herself because her entire salary
was flowing into investments. She was using the cash allowances received from
her employer for her day-to-day needs and investing the entire salary that came
by cheque.“The tax officer will estimate the household expenditure you are
likely to incur based on your earning capacity, family size, lifestyle and
number of earning members. If your bank statement does not show commensurate
withdrawals for expenses, the question will arise how you are surviving on so
little,“ says Manish Shah, partner, S K Parekh & Company. The taxman
assumes that you have undeclared sources of income. If allowances are being
used for day-to-day ex submitted bogus receipts to claim those allowances. “If
you stay in your parents' house and claim HRA exemption, your bank statement
should be able to validate the payment of rent,“ says Kumar.
Not filing wealth tax return
Apart from income tax, you may also
be liable to pay wealth tax. Most people are blissfully unaware that if they
own certain assets, including jewellery, gold or silver bullion, vacant house,
non-agricultural land, costly watches, luxury cars and paintings, they have to
shell out wealth tax. If the aggregate value of these assets exceeds Rs.30
lakh, they have to pay 1% of the amount by which it exceeds Rs.30 lakh. This
also includes cash worth over Rs.50,000. “One house is exempt from wealth tax.
Also, if you have rented out your second home for more than 300 days in a year,
it will also be exempt,“ says Kumar. If the property is used to conduct
business, then it is not included for computation of wealth tax.Any loan
outstanding against the house will also be subtracted from the market value of
the house. However, the valuation of these items is a tedious process. “Only
government approved valuers can be approached in this regard,“ says Kaushik.
Perhaps that is why tax authorities are relatively soft on implementing wealth
tax provisions -wealth tax accounts for less than 0.25% of the total direct
taxes collected. This doesn't mean the taxman will not go after you for not
paying it. There is a stiff penalty for evading wealth tax. Incorrect
declaration can invite a fine of up to 500% of the evaded tax. One can also be
jailed for up to seven years if the tax due is over Rs.1 lakh.
Reversal of Section 80C benefit
For salaried employees in the organized
sector, the Employees' Provident Fund (EPF) is a great way to save for
retirement, but for some, it can also be the reason for a tax notice. Many
people withdraw their PF when they change jobs. The monthly contribution to the
EPF is eligible for deduction under Section 80C. If the balance is withdrawn
within five years of joining the organization, the entire deduction claimed in
previous years will be reversed. Similarly, if you junk a life insurance policy
within two years of buying, the tax benefits claimed under Section 80C will be
reversed. The same holds true if you sell a house within five years. If you
availed of tax benefits on the loan, all the deductions claimed in the previous
years, including on principal repayment and payment of stamp duty along with
registration fees, will be added to the taxable income of the year. Since the
onus of reversing the benefit and paying the tax for the previous years is on
the taxpayer, many people will conveniently skip mention ing it in their tax
return. “These issues are not likely to be picked up by the taxman in
isolation,“ says Sanghavi. “But in case your return is picked up for scrutiny,
the inves tigating officer may come across these facts,“ he adds.
Items received as gifts
Diamonds are a girl's best friend,
but if you gift a solitaire diamond ring worth Rs.1 lakh to your friend, she
might end up paying a huge tax on it. Gifts from unrelated people are taxable
if the annual value exceeds Rs.50,000. The gifts received from blood relatives
or on specific occasions like marriage or under inheritance or by will are not
taxable. The specific assets for which gift tax is applicable include cash, immovable
property, such as land and buildings, and movable property, including financial
assets (shares, fixed deposits), jewellery and bullion, art and antiques. Since
such instances of gifting occur regularly in our lives, it is a must that one
is aware of the tax implications. “Even when you are the one who is gifting
money, you may come under the scanner if the recipient of the gift happens to
come under scrutiny,“ cautions Sanghvi.
Our intention is not to alarm our
readers. If you have missed some income in your tax return or made a mistake in
calculating your tax liability, we suggest you file a revised return. You might
have to shell out a small amount in tax, but you will be able to sleep easy.
You can revise your return as many times as you want. However, a revised return
can be filed only if you filed the original return before the 31 July deadline.
Now, here's one more reason to file your tax return on time.
(Courtesy: Times of India)
