The duration for holding on to income tax-related documents depends on the type of income and financial transactions. In some cases, you may have to preserve the documents for up to 16 years
Filing an income tax return (ITR) is an annual ritual for all those who have had any income or losses during the year gone by. For many taxpayers, the last date for filing the income tax return got over on 5 August. However, there are others who need to get their accounts audited before filing ITR. For these taxpayers, the extended last date for filing the return is 17 October.
All these returns have to be e-filed and under the e-filing facility, typically the supporting documents are not required to be attached. Therefore, after you file your return, the documents and proofs on the basis of which your return was filed, need to be maintained. So, while doing your festive cleaning, don’t get rid of your financial documents, especially those relating to ITR. Different documents are needed to be maintained, depending on the tax payer’s profile and nature of the financial transactions. Here’s a look at the documents that need to be maintained, and for how long.
“While the Income-tax Act, 1961 specifies the documentation requirements for professionals or businessmen, it is silent in respect of salaried persons or persons earning capital gains,” said Suresh Surana, founder, RSM Astute Consulting Group. However, even in case of salaried individuals, the department can raise questions on the ITR filed and ask for supporting documents. Therefore, documents that need to be maintained include: Form 16, rent receipt for claiming house rent allowance (HRA) deduction, proofs of investment made (including life and medical insurance payment receipts), repayment certificate for housing loan, education loan (where applicable) and children fees. “A salaried individual should maintain the records for 6 years from the end of the relevant assessment year,” added Surana.
Self-employed professionals and businesspersons have to maintain a lot of documents; starting from the cash book that records daily sales or fees received, down to records of any payments and expenses. These and other documents form the basis of various ledgers and journals that also need to be maintained. There are also specified procedures that need to be followed while preparing and maintaining these documents. In case of specified professionals such as lawyers, doctors, engineers, architects and accountants, certain specified documents have to be maintained, as specified under section 44AA of the Income tax Act, 1961.
“Every person carrying on a business or a profession is required to maintain such books of accounts and other documents that will enable the assessing officer to determine the total income,” said Surana. Even those businesses and self-employed professionals who opt for the presumptive taxation scheme, but declare lower income than what is deemed in the scheme, need to maintain the books of accounts for 6 years from the end of relevant assessment year.
Your primary income source may be salary or profits from a business or profession. However, there could be instances where you want to declare capital gains or losses. These gains or losses could come from transacting in capital assets such as residential property, gold or stocks. “While declaring capital gain transactions in the return of income, the tax payable is based on the cost of acquisition and date of acquisition of the capital asset under consideration and also the new asset purchased to claim capital gain exemption,” said Rakesh Nangia, managing partner, Nangia & Co. “Hence it is imperative that documents like buyers’ agreement and details of payment made are maintained,” he added.
Documents related to capital gains or losses should be maintained for 6 years from the end of the relevant assessment year.
Under the Act, if any foreign income is suspected to have escaped the tax net, the department can issue a notice to reopen the case up to 16 years after the end of the relevant assessment year, said Surana. So, if you had declared foreign income in your returns, keep all the documents of such income. This is also important because: “In case of foreign income, generally a taxpayer claims foreign tax credit”, said Surana. For claiming foreign tax credit, the recently notified rules provide that the taxpayer should obtain a certificate or statement specifying the nature of income and tax deducted or paid from the tax authority of the country or specified territory. If the income was paid by an individual, a certificate of income from that person too needs to be maintained.
The onus of proving the basis on which a tax return was filed, lies on the taxpayer, said Nangia. “If a taxpayer is unable to furnish supporting documents that substantiate the claims made in the return of income, the revenue authorities may deny those claims and levy tax, interest, penalty and in case of gross neglect may even initiate prosecution,” added Nangia.
For instance, if a businessman does not maintain the books of account properly, based on which the ITR has to be prepared and the account audited, then the penalty can be as high as Rs25,000. If no documents are maintained, the penalty can be as per the discretion of assessing officer, said Surana.
Also, high penalty can be levied if evidence relating to claims or deductions—that were made to bring down the taxable income—are not maintained. “Penalty of 200% of the tax payable on underreported income can be levied under the new penalty provisions under section 270A,” said Surana. Further, “in case of large businesses, that are covered under transfer pricing norms (where transaction takes place between different divisions of an organisation), penalty equal to 2% of the value of each transaction may be levied for failure to maintain relevant documents,” he added.
To avoid tax scrutiny and avoid paying penalties, maintain proper documents to support your tax returns. Given that taxman can ask for any related documents even after few years, it is better to keep them safe and handy for as long as necessary