Ten rules you must follow while filing income tax returns
June, 27th 2017
All of us believe that we are paying a lot of tax. Well, the time has come to record it as well. By filing your tax return, you declare how much income you earned during the year, the deductions you claimed and the tax you paid.
The equation is fairly simple, yet many taxpayers mess up their tax returns—either out of greed, ignorance of tax rules, or just lack of time. Take for instance the interest that nearly every taxpayer earns from bank FDs, recurring deposits and NSCs.
This interest is fully taxable, but is rarely mentioned in the tax returns. “Our research shows that nine out of 10 taxpayers go wrong in reporting their interest income,” says Sudhir Kaushik, Cofounder and CFO of Taxspanner.com.
Some of these mistakes are not very serious offences and the taxpayer will get away with a mere additional tax demand. But some other errors, such as not mentioning cash deposits after demonetisation or foreign assets and income, can land the taxpayer in serious trouble. How can taxpayers avoid these mistakes?
This week’s cover story lists out 10 commandments for those who will be filing their returns in the coming weeks. There have been several changes in the tax filing rules in the past one year. Our canons of prudent tax filing take note of these changes and accordingly guide taxpayers so that their returns are flawless. The tax filing deadline is still a month away. But our advice to you is to get cracking on your return right away.
Who needs to file tax returns? If the gross taxable income after exemptions, but before deductions, exceeds the basic limit, or if a tax refund has to be claimed, you need to file your tax return.
I: THOU SHALL FILE RETURNS IF INCOME EXCEEDS BASIC LIMIT Do you have to file your tax return? Taxpayers hold many misconceptions about this. Some think if their income is not taxable, they needn’t file their return. Others believe that if tax has been deducted at source, their tax compliance is taken care of. The rules say that an individual has to file his tax return if the gross taxable income is above the basic exemption limit. This limit is Rs Rs 2.5 lakh for general taxpayers, Rs 3 lakh for senior citizens (above 60) and Rs 5 lakh for very senior citizens (above 80).
Remember, the gross income is computed after taking into account exemptions such as house rent, conveyance and other allowances, but before the deductions. As the table shows, Taxpayer A does not have any tax liability because deductions will reduce his tax to zero. But he still has to file his tax return because his gross total income is above Rs 2.5 lakh.
Similarly, the very senior citizen is not obliged to file his return because his income is below the Rs 5 lakh exemption limit. But he will need to file his return if he wants to claim refund of the TDS on his fixed deposits and bonds.
II: THOU SHALL VERIFY TDS DETAILS IN FORM 26AS Once it is clear that you have to file returns, the next step is to verify whether the tax deducted on your behalf has been credited to your PAN. While the tax deducted by your employer will reflect in the Form 16, check out your Form 26AS online to make sure that all other taxes (advance tax, TDS on interest and other incomes) have also been credited to your PAN.
If there is a discrepancy, notify the deductor and get it rectified. The tax authorities consider this document as the sole proof of taxes paid by you. Once the return is filed, the tax department’s system reconciles the details in the return with the amounts appearing in the taxpayer’s Form 26AS.
Expect a notice if the two don’t match. It is easy to access your Form 26AS if you have Netbanking and your PAN is linked to the account. A few clicks will take you to Form 26AS. Details get updated after a lag of a few days. So if you have just paid a self-assessment tax, wait for a few days to find the updated details in your form. Usually, details of tax deducted by companies and other deductors during the previous financial year are updated by mid June.
III: THOU SHALL CHOOSE THE RIGHT FORM FOR FILING RETURN One big confusion among taxpayers is which form they must use to file their return. Most tend to use the ITR 1 because it is simple to fill. The rules relating to forms have changed this year. Here is a guide to the forms that individuals have to use:
ITR 1 or SAHAJ
Use it if you have... Income from salary or pension Income from one house property Income from other sources (interest, dividends, etc)
Don’t use if... You are carrying forward losses Your total income exceeds Rs 50 lakh You hold foreign assets Agricultural income exceeds Rs 5,000 You have taxable capital gains You have income from business or profession You earn income from more than one house property
Use it if you have... Income from salary or pension Income from house property Income from capital gains Income from other sources Income as a partner in firm Foreign assets and income Agricultural income of over Rs 5,000
Don’t use if... You have income from business or profession
Use it if you... Are an individual or HUF with income from proprietary business or profession. Have income from house property, salary, pension and other sources
Don’t use if... You have opted for presumptive taxation
IV: THOU SHALL MENTION CASH DEPOSITS AFTER DEMONETISATION If you deposited more than Rs 2 lakh in cash in your bank after demonetisation, it has to be reported in the tax return. Mind you, the Income Tax Department has already got details (name, address, PAN) of the cash deposited by individuals. This information can be matched with the ITR. In case there is a mismatch in the reporting, the individual can expect a notice.
You can get into serious trouble if you don’t report the cash deposits in your return. The penalty for misreporting can range from 50% to 200% of the under-reported income.
What’s more, the taxpayer can also be prosecuted for submitting a false statement. Apart from the post-demonetisation deposits, the tax department has other details too. Banks are supposed to report if an individual makes cash deposits of more than Rs 10 lakh in a financial year in one or more accounts or opens fixed deposits of over Rs 10 lakh.
“Several other transactions, such as payments in cash, or cheque are also reported. So even if deposits are made after demonetisation, and they exceed the specified threshold, these will be reported by the banks in the annual information return,” says Archit Gupta, founder and CEO, Cleartax.in.
V: THOU SHALL INCLUDE INTEREST AND OTHER INCOME IN RETURN Almost six out of 10 taxpayers are under the misconception that interest from tax-saving fixed deposits is tax free. They don’t realize that these deposits help save tax under Sec 80C, but the interest is fully taxable. “Our research shows nine out of 10 taxpayers go wrong in reporting interest income,” says Sudhir Kaushik, Co-founder & CFO, Taxspanner.com. The tax department has introduced new rules to plug this leak.
Till two years ago, TDS kicked in when the interest income from deposits made in a bank branch exceeded the threshold of Rs 10,000 in a financial year. Investors used to split their deposits across branches to avoid TDS. But the 2014 Budget changed the rules. TDS now applies if the combined income from deposits in all branches of a bank exceeds the threshold.
After the 2015 Budget, TDS also applies to recurring deposits if the interest during a financial year exceeds Rs 10,000. As banks start sharing data, there could be TDS if the interest from deposits made across other banks exceeds the threshold. Don’t think you can get away by not reporting interest income. As soon as TDS kicks in, the details of the PAN reaches the tax department and get mentioned in the Form 26AS. If the individual does not report the income on which tax has been deducted, the department will send him a notice.
VI: THOU SHALL MENTION YOUR AADHAAR IN THE TAX RETURN After a bitter legal and political battle, there is some clarity on the Aadhaar and your tax return. Individuals who have the Aadhaar must mention it in their tax returns. Only those who do not have an Aadhaar are exempt from the rule. “Don’t treat the Aadhaar as an optional requirement. If you don’t quote your Aadhaar, the return can get accepted right now but you may get a notice for willfully holding back information required to be mentioned in the return,” says Kuldip Kumar, Partner and Leader Personal Tax, PwC India.
He points out that the tax authorities have power to slap a fine or even prosecute you for submitting a false statement in verification under section 277 of the Income Tax Act, 1961. If you have the Aadhaar, it is also necessary to link it with the PAN if you are filing your tax return. This is very easy and takes barely five minutes. Experts say the Aadhaar will soon become a must for all your financial needs. “Going forward, almost all aspects of one’s financial life will be linked to Aadhaar. So, if you don’t already have Aadhaar, get one right away,” advises Kumar of PwC.
VII: THOU SHALL NOT IGNORE INCOME FROM PREVIOUS EMPLOYER When people change jobs, they often see a drastic drop in their tax outgo. Often, the new employer doesn’t take into account the income earned from the previous job. Tax is deducted on the assumption that income for the remaining months is the only income for the year. But this mistake is discovered when he files his tax return. At that time, the incomes from the two employers are added and the deduction and exempti ..
This also means a large tax payment at the time of filing returns because the duplicate benefits are rolled back. Some people think they can get away with a lower tax if they don’t mention the income from the previous employer in your return. This is a misconception. If some tax has been deducted on the income from the first employer, it will be reflected in Form 26AS.
If the person doesn’t report that income, the discrepancy will get picked up by the computerised scrutiny system and he will get a tax notice. The smart thing to do is to inform the new employer about the income from the previous job so that the tax liability is correctly calculated.
VIIII: THOU SHALL DISCLOSE FOREIGN ASSETS AND INCOME This has caused a lot of problems for taxpayers who have been abroad in recent years. You have to give details of your foreign bank account’s holding status (both as an owner and as a beneficiary), account opening date, interest accrued during the year and schedule and field number under which the same income is reported. Any misreporting of foreign assets immediately puts you in the dock.
Tax professionals feel that the government is unfairly targeting salaried people when it is actually businessmen who may have stashed black money abroad. “The logic used by the tax department is that anyone with foreign assets has high income and should not be spared if he has concealed income,” says Komal Agarwal of Mahesh K. Agarwal & Company. Interestingly, this clause applies to foreigners posted in India as well. But some people have found a way around this rule by limiting their stay in the country to less than three years.
IX: THOU SHALL DISCLOSE ALL ASSETS IF EARNING OVER Rs 50 LAKH When it comes to taxes, the rich in India don’t have it easy. Last year, the threshold for 10% surcharge on tax was lowered from Rs 1 crore to Rs 50 lakh. This year, the surcharge was raised to 15%. Taxpayers in that income bracket were also required to mention details of the physical assets they owned. Now, the tax department wants them to also give details of their financial assets. One will have to declare any land or building under immovable assets.
Movable assets list includes cash in hand (in your savings account), vehicles (including yacht, boats and aircraft), jewellery, bullion and other valuable metals. “Financial assets will mean insurance policies, loans, shares and bonds and fixed deposits,” says Chetan Chandak of H&R Block. Liabilities will include any outstanding loans you have.
Experts say taxpayers will find it challenging to value their assets themselves. However, the assets have to be valued at cost. “Those with taxable income of over Rs 50 lakh have to mention their assets and liabilities, including financial assets. The cost value of the assets mentioned should be accurate. The tax authorities may question if there is a difference in the cost value of the asset and the figure mentioned in the return,” says Kuldip Kumar of PwC India.
X: THOU SHALL FILE BEFORE DEADLINE AND VERIFY RETURN If you have followed all the commandments, here is one last rule you cannot afford to ignore. File the return before the 31 July deadline. Till last year, there was no penalty for filing delayed returns. One could even file returns of the previous two years without a hitch if all his taxes were paid. But the rules have now been changed.
Earlier, belated return could be filed at any time before the expiry of one year from the end of the relevant assessment year. So, the returns for the financial year 2014-15 (assessment year 2015-16) could be filed till 31 March 2017. However, now, belated returns may be filed before the end of the relevant assessment year. This reduces the time window by a year.
“A new section 234F inserted in the Income Tax Act has fixed a penalty for delay in filing. It is applicable from the assessment year 2018-19. For now, the penalty is Rs 5,000 if the return is not filed the return before the end of the relevant assessment year,” says Archit Gupta, Founder and CEO, Cleartax.in