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You could be filing a faulty tax return; here's how to avoid getting it rejected
August, 17th 2015

He hasn't got money stashed away in foreign banks, doesn't buy benami properties and diligently files his tax return before the last date. Yet, Kiran Chandorkar could get a tax notice because he doesn't declare the interest from fixed deposits and tax saving infrastructure bonds in his return.

"The interest from FDs is tax-free because it is less than Rs 10,000 a year and the infrastructure bonds are tax saving instruments," explains the Bengaluru-based IT professional. Chandorkar is not alone. An online survey conducted by economictimes.com last week indicates an abysmal level of tax literacy. The tax returns of 66% of the 2,158 respondents could get rejected because of faulty information.

Almost 34% could even get a scrutiny notice because of grave errors in their tax forms. Like Chandorkar, almost 30% of the respondents believe that interest of up to Rs 10,000 from bank FDs is tax free in a year. They should know that the exemption under Section 80TTA is only for the interest on their savings bank accounts. What they earn on fixed deposits and recurring deposits is fully taxable.

You could be filing a faulty tax return; here's how to avoid getting it rejected

Similarly, almost 30% believe that the interest earned on the tax-saving infrastructure bonds bought a few years ago under Section 80CCF is not taxable because they were tax saving instruments. Wrong again. The bonds may have helped them save tax, but the interest is fully taxable and has to be reported. Nearly 45% of the 637 respondents who said so earn over Rs 12 lakh a year and should be paying 30% on the income they think is tax free.

You could be filing a faulty tax return; here's how to avoid getting it rejected

"These are very common misconceptions. Our research shows that nine out of 10 taxpayers go wrong in reporting their interest income," says Sudhir Kaushik, Co-founder and CFO of Taxspanner.com. There is also a misconception that there is no need to report the income if the bank has deducted TDS. But TDS is only 10%, and if your income puts you in the 20% or 30% tax bracket, you have to pay additional tax. Of course, if the income is below the basic exemption limit, the TDS will be refunded when the investor files his return.

To be sure, not reporting a small amount of interest income or claiming a deduction incorrectly rank very low in the hierarchy of tax offences. At most you will get a notice with an additional tax demand. There may even be a penalty under Section 271 (c) for concealment, but it depends on how the assessing officer views the transgression. "If the assessing officer is convinced that it was a genuine mistake and the taxpayer's intent was not to evade tax, he might not levy a penalty," says Divya Baweja, Partner with Deloitte, Haskins & Sells.

Fool's paradise

On the other hand, if the intention is clearly to conceal the income, the taxpayer can be in hot water. From this year, the tax forms have a separate column for declaration of property. If you have more than one property, you have to mention it in the return. If it has been rented out, the rental income will have to be declared in the return and tax paid on it. Even if the property is lying vacant, the owner has to pay tax on the notional rent from the property. This notional rent is the prevailing market rate in that location. "This rule about the tax on notional rent was always there. It is only that this year's tax forms have made it clear by providing a separate column for such property," says Vineet Agarwal, Partner in KPMG India.

You could be filing a faulty tax return; here's how to avoid getting it rejected
If you don't declare the second property, it amounts to concealment of income and could attract a severe penalty. "Such a taxpayer will be seen as a wilful defaulter and could get slapped with a penalty," says Kaushik. Shockingly, nearly 20% of the survey respondents fall in this category. They believe that there is no tax implication of a house lying vacant. One out of three such taxpayers are in the highest 30% tax bracket.

Keep in mind that even if you are able to avoid mentioning the property in your tax return, it will ultimately get noticed by the taxman. TDS is now applicable on property transactions above Rs 50 lakh. If and when you sell the property and claim indexation benefit on long-term gains or seek a refund of the TDS, the tax department might want to know why the property was not declared in the tax return of the owner from the time it was purchased.

Declaration of foreign assets

This is one area where taxpayers need to really be very careful this year. Uncovering black money is high on the government's agenda, and any slippage on reporting of foreign assets immediately puts you in the dock. "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, Partner in Mahesh K. Agarwal & Company. Thankfully, almost 89% of the respondents got this right.

You could be filing a faulty tax return; here's how to avoid getting it rejected But that still leaves around 11% of taxpayers who might falter when it comes to declaring their foreign assets. The department is keeping a close eye on the accounts and assets held outside India. The new ITR-2 requires you 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 fields number under which the same income is reported.

Not only foreign bank accounts, but even domestic bank accounts need to be reported in the new forms. "A taxpayer has to report all his bank accounts in the return. If you miss any, it amounts to concealment of information," says Preeti Khurana, Chief Content Editor, ClearTax.in.

TDS gives you away

For many taxpayers, TDS is a four-letter word. More than 15% respondents said they would spread their investments across bank branches to avoid TDS. This might help them avoid TDS, but it's a ticking time bomb. Till now, TDS kicked in only if the income from FDs made in a particular bank branch exceeded the threshold of Rs 10,000 in a financial year.

You could be filing a faulty tax return; here's how to avoid getting it rejected

But this year's budget has changed the rules and TDS will now apply if the combined income from FDs in all branches of a bank exceeds the threshold. Another significant change is that TDS will apply to recurring deposits if the interest during a financial year exceeds Rs 10,000. "The tax department is increasingly connecting the dots. An individual's financial life can no longer remain hidden," says Vikram Ramchand, Co-founder of makemyreturns.com.

TDS is a dead giveaway because it shows up in the taxpayer's Form 26AS. If the income and the TDS is mentioned in the Form 26AS but you haven't reported it in the tax return, the mismatch will be picked up by the computerised scrutiny system in the tax department and a notice will be issued. How lenient an assessing officer will be in such a case is anybody's guess.

Clubbing of income

Another way taxpayers are falling through the cracks is clubbing of income. Tax rules say that if you invest on behalf of your spouse or minor child, the income from the investment will be treated as yours. But more than 30% of the respondents believe that there is no tax implication if they invest in a recurring deposit in their wife's name or open a fixed deposit in the name of a minor child. This could prove to be a problem if the amount invested in the name of the spouse is significantly large and not commensurate with her known sources of income. Of the 668 respondents who believe this, more than 30% are in the highest tax bracket. Another 50% earn more than Rs 5 lakh a year, which puts them in the 20% tax bracket.
You could be filing a faulty tax return; here's how to avoid getting it rejected
A small minority of taxpayers is also going wrong about whether they have to file their returns at all. But a significant 45% is mistaken whether they have to take the online route or not. Online filing is compulsory if your income is above Rs 5 lakh, you have foreign assets, or are claiming a refund. "Even if a physical return is accepted in the last-minute rush, it will ultimately get rejected," says Kaushik of Taxspanner.com
You could be filing a faulty tax return; here's how to avoid getting it rejected
Missing out on deductions

Not all of the mistakes that taxpayers make raise the hackles of the taxman. Some also cost the taxpayer. More than 40% of the respondents did not know that along with the interest on a home loan for a self-occupied house, even the processing fees for the loan is also eligible for deduction under Section 24.
Another 15% was blissfully unaware that the fees paid for a preventive health checkup of the taxpayer and his family is eligible for deduction under Section 80D. A small but significant 7% were not aware that tuition fees of up to two children can be claimed as a deduction under Section 80C.

 
 
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