There are many reasons why small taxpayers can get into trouble with tax authorities. "My mother is a senior citizen and has paid all her taxes. But she still got a notice for not filing her return for 2014-15," says Mumbai-based marketing manager Arun Kapoor. Delhibased finance professional Varun Sahay received a notice for not deducting TDS when he bought a flat last year. "I had no idea that I was supposed to deduct 1% of the house's value and deposit the amount with the government on behalf of the seller," he says.
In recent months, the tax department has stepped up efforts to ensure tax compliance. New rules have been introduced to plug leaks and officials are cracking down on evasion. Tax records are being scanned and notices being sent to individuals if the computer-aided selection system notices a discrepancy.
We look at six mistakes that can fetch you a tax notice. Some mistakes are just calculation errors. But others are serious transgressions that can invite penalties of up to 300% of unpaid tax. We tell you where you are going wrong and the correct position on the matter. We also offer tips to help you avoid falling foul of the tax rules.
NOT REPORTING INTEREST INCOME
Interest income from fixed deposits, recurring deposits, tax saving bank deposits and infrastructure bonds is fully taxable. Yet, 59% of respondents to a recent online survey believed that interest income of up to `10,000 a year is tax free. The tax exemption of `10,000 a year under Sec 80 TTA applies only to interest earned on bank savings account balance.
Another 6% of respondents thought no tax is payable if the bank deducts TDS. TDS is only 10% of the income. If the taxpayer falls in a higher tax slab, the liability is higher. Interest income is often unreported in tax returns. Till two years ago, TDS kicked in when the interest from deposits made in one bank branch exceeded `10,000 in a financial year. Investors used to split deposits across 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.
Smart Tip: Calculate how much interest you will get on your FDs, RDs and other ? xed income investments and add that to your income.
IGNORING INCOME OF PREVIOUS JOB
Every time you switch jobs, you are in danger of falling foul of 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 `2.5 lakh basic exemption and `1.5 lakh deduction under Section 80C, you get `5 lakh basic exemption and `3 lakh deduction. However, this discrepancy will be discovered when you file your return. This would translate to a large tax payment at the time of filing returns because the duplicate benefits would be rolled back.
Smart Tip: Inform your new employer about income from previous job so that the TDS is cut accordingly.
NOT FILING TAX RETURNS
A lot of taxpayers 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 `2.5 lakh per year for people below 60, `3 lakh for senior citizens above 60 and `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 `4.2 lakh and you invest `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 `5 lakh a year were exempted from filing returns. However, that rule has long been withdrawn. Not filing returns is not a serious offense if all taxes are paid. You will get a notice asking you to do the needful. Tax laws allow a taxpayer to file delayed returns even after the due date.
Smart Tip: Don't miss ?ling your return even if your tax is zero or all your taxes are paid. File online to avoid mistakes. MISUSING FORMS 15G, 15H TO AVOID TDS Many investors try to avoid TDS by splitting 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. Misuse of these forms is a serious offence. A false declaration can attract a jail term.
You need to meet two conditions to file form 15G. One, your taxable income for the year should not exceed `2.5 lakh. Two, the total interest received during the financial year should not exceed `2.5 lakh. Form 15H, for senior taxpayers above 60, imposes only the first condition. The final tax on total annual income should be nil. Senior citizens whose taxable income is below the `3 lakh limit are eligible to file Form 15H. For those above 80, this limit is `5 lakh.
Smart Tip: File Form 15G if you ful? ll both conditions. TDS is an interim tax and you can claim a refund.
NOT DEDUCTING TDS WHEN BUYING PROPERTY
THE GOVERNMENT has extended the scope of TDS to property transactions as well. If you buy a house worth more than `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 30%. This amount should be deposited with the government on behalf of the seller using Form 26QB. Sahay had no idea of this rule when he bought a property last year. He now has to respond to a tax notice, and could be slapped with a penalty of `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. Many are not sure how to calculate the tax. TDS has to be calculated on the total sale price and not just the amount exceeding `50 lakh. 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.
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.
NOT REPORTING FOREIGN ASSETS
Taxpayers cannot afford to be unsure about their foreign income and assets. 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 `10 lakh for even small errors. Taxpayers who have worked abroad often go wrong when reporting foreign assets. Same goes for employee stock options which are often acquired at no cost and sold out, but get missed when you take an account of assets.
SEE ALL COMMENTSADD COMMENT
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. Also, all foreign bank accounts—whether operational or not—need to be reported. You even have to report bank accounts where you are merely a signing authority.