They may not figure in the Panama Papers, nor have wads of cash stuffed under their beds and investments in benami properties. But there are other reasons why small taxpayers can get into trouble with the 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. Delhi-based finance professional Varun Sahay has received a notice for not deducting TDS when he bought ..
Another 6% of the respondents believed that no tax is payable if their bank has deducted TDS. These taxpayers don't realise that TDS is only 10% of the income. If they fall in a higher tax slab, their liability would be higher. In our survey, almost 50% of the respondents who got this wrong have an annual income of over Rs 10 lakh. They pay 10% TDS even though they are supposed to shell out 30%.
Interest income often goes unreported in tax returns. In recent years, new rules have been introduced to plug this leak. Till two years ago, TDS kicked in when the interest from deposits made in one bank branch exceeded Rs 10,000 in a financial year. Investors used to split their deposits across bank 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.
In future, as banks start sharing data, TDS could be applied to deposits made across other banks as well. "The mechanism to track deposits across other banks already exists. If banks share the names and PANs of fixed deposit investors, lakhs of individuals could come in the tax net," says M.K. Agrawal, Senior Partner, Mahesh K Agarwal & Co.
2. Ignoring income of old job
Every time an individual switches jobs, he is in danger of falling foul of the 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 Rs 2.5 lakh basic exemption and Rs 1.5 lakh deduction for tax saving investments under Section 80C, he gets Rs 5 lakh basic exemption and Rs 3 lakh deduction. Obviously, he will be paying much less tax than he ought to.
But this discrepancy won't remain hidden for long and would eventually be discovered when the taxpayer files his return. The incomes in the two Form 16s would be added but he would get basic exemption and deduction only once. This also means a large tax payment at the time of filing returns because the duplicate benefits would be rolled back. The last date for paying the tax is 15 March. After this, if the unpaid tax exceeds Rs 10,000, there is a penal interest of 1% per month of delay. "The employee will have to pay the balance tax along with interest at the rate of 1% per month for delay," says Vaibhav Sankla, Director, H&R Block.
Once rare, such cases are now quite common. In recent months, the tax department has stepped up efforts to ensure tax compliance. New rules have been introduced to plug tax leaks and officials are cracking down on evasion. Tax records are being put under the scanner and notices are being sent to individuals if the computer-aided selection system notices a discrepancy. Thousands of taxpayers have already received tax notices.
This week's cover story looks at 10 common mistakes that can fetch you a notice from the tax department. Some of these mistakes are merely calculation errors that will result in a tax demand. But some others are serious transgressions that can invite penalties of up to 300% of the unpaid tax. We tell you where taxpayers are going wrong and the correct position on the matter. We also offer smart tips to help you avoid falling foul of the tax rules. We hope you will find this information useful. I ..
1. Not reporting interest income
This is a common mistake. Interest income from fixed deposits, recurring deposits and even tax saving bank deposits and infrastructure bonds is fully taxable. Yet, 59% of the respondents to an online survey conducted by ET Wealth believed that interest income of up to Rs 10,000 a year is tax free. Actually, the tax exemption of Rs 10,000 a year under Sec 80TTA applies only to the interest earned on the balance in a savings bank accounts.
1. Not reporting interest income
This is a common mistake. Interest income from fixed deposits, recurring deposits and even tax saving bank deposits and infrastructure bonds is fully taxable. Yet, 59% of the respondents to an online survey conducted by ET Wealth believed that interest income of up to Rs 10,000 a year is tax free. Actually, the tax exemption of Rs 10,000 a year under Sec 80TTA applies only to the interest earned on the balance in a savings bank accounts.
Every time an individual switches jobs, he is in danger of falling foul of the 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 Rs 2.5 lakh basic exemption and Rs 1.5 lakh deduction for tax saving investments under Section 80C, he gets Rs 5 lakh basic exemption and Rs 3 lakh deduction. Obviously, he will be paying much less tax than he ought to.
But this discrepancy won't remain hidden for long and would eventually be discovered when the taxpayer files his return. The incomes in the two Form 16s would be added but he would get basic exemption and deduction only once. This also means a large tax payment at the time of filing returns because the duplicate benefits would be rolled back. The last date for paying the tax is 15 March. After this, if the unpaid tax exceeds Rs 10,000, there is a penal interest of 1% per month of delay. "The employee will have to pay the balance tax along with interest at the rate of 1% per month for delay," says Vaibhav Sankla, Director, H&R Block.
This is a common problem faced by people who switch jobs without keeping an eye on their taxes. They are saddled with a huge tax liability when they sit down to file their tax returns in June-July.
Don't think you can get away by not mentioning the income from the previous employer in your return. If some tax has been deducted on the income from the first employer, it will be reflected in your Form 26AS. So if you don't report that income, the discrepancy will immediately up by the computerised scrutiny system and you will get a tax notice.
Smart tip: Inform your new employer about income from previous job so that the TDS is cut accordingly.
3. Not filing tax returns
A lot of taxpayers, especially senior citizens such as Kapoor's mother, 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 Rs 2.5 lakh per year for people below 60, Rs 3 lakh for senior citizens above 60 and Rs 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 Rs 4.2 lakh and you invest Rs 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 Rs 5 lakh a year were exempted from filing returns. However, that rule has long been withdrawn. "Although the regulation was applicable only to that particular financial year, many people tend to still follow it," says Archit Gupta, Founder and CEO of Cleartax.in.
Don't think you can get away by not mentioning the income from the previous employer in your return. If some tax has been deducted on the income from the first employer, it will be reflected in your Form 26AS. So if you don't report that income, the discrepancy will immediately up by the computerised scrutiny system and you will get a tax notice.
Smart tip: Inform your new employer about income from previous job so that the TDS is cut accordingly.
3. Not filing tax returns
A lot of taxpayers, especially senior citizens such as Kapoor's mother, 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 Rs 2.5 lakh per year for people below 60, Rs 3 lakh for senior citizens above 60 and Rs 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 Rs 4.2 lakh and you invest Rs 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 Rs 5 lakh a year were exempted from filing returns. However, that rule has long been withdrawn. "Although the regulation was applicable only to that particular financial year, many people tend to still follow it," says Archit Gupta, Founder and CEO of Cleartax.in.
Not filing returns is not a very serious offence if all your taxes are paid. You will only get a notice asking you to do the needful. The tax laws allow a taxpayer to file delayed returns even after the due date has passed. But if you have unpaid taxes, be ready to pay interest as well as a penalty of up to Rs 5,000.
Smart tip: Don't miss filing your return even if your tax is zero or all your taxes are paid. File online to avoid mistakes.
Smart tip: Don't miss filing your return even if your tax is zero or all your taxes are paid. File online to avoid mistakes.
4. Tax sops on house sold before 5 years
The government offers generous tax benefits to those who buy houses on loans. But if the buyer turns into a seller too early, some of these benefits are rolled back. If you sell the house within five years, the tax benefits availed of under Sec 80C for the principal repayment will get reversed.
The government offers generous tax benefits to those who buy houses on loans. But if the buyer turns into a seller too early, some of these benefits are rolled back. If you sell the house within five years, the tax benefits availed of under Sec 80C for the principal repayment will get reversed.
This could mean a heavy tax liability if you have claimed deduction for the principal repayment of the home loan under Sec 80C. You won't be able to keep this under wraps because the buyer may seek tax benefits on the same property. However, the deduction for the interest on the home loan under Sec 24 will not be rolled back.
Similarly, if you have ended a life insurance policy within three years of purchase, any tax deduction availed on the policy will be reversed. Not many taxpayers are aware of this rule about insurance policies. "No taxpayer is so honest as to report this in his ITR and pay additional tax for the previous years," says a chartered accountant.
Smart tip: Wait for at least five years before selling a house or three years before ending a life insurance policy.
However, misuse of these forms is a serious offence. "A false declaration not only attracts penalty but also prosecution. The taxpayer can be sentenced to jail for terms ranging from three months to two years," says Sudhir Kaushik, Co-founder and CFO, Taxspanner.com. This doesn't stop people from blindly filling the forms to escape TDS.
Similarly, if you have ended a life insurance policy within three years of purchase, any tax deduction availed on the policy will be reversed. Not many taxpayers are aware of this rule about insurance policies. "No taxpayer is so honest as to report this in his ITR and pay additional tax for the previous years," says a chartered accountant.
Smart tip: Wait for at least five years before selling a house or three years before ending a life insurance policy.
5. Misusing forms 15G, 15H to avoid TDS
As mentioned earlier, many investors try to avoid TDS by splitting their 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.
As mentioned earlier, many investors try to avoid TDS by splitting their 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.
However, misuse of these forms is a serious offence. "A false declaration not only attracts penalty but also prosecution. The taxpayer can be sentenced to jail for terms ranging from three months to two years," says Sudhir Kaushik, Co-founder and CFO, Taxspanner.com. This doesn't stop people from blindly filling the forms to escape TDS.
You need to meet two basic conditions to file form 15G. One, your taxable income for the year should not exceed the basic exemption of Rs 2.5 lakh. Two, the total interest received during the financial year should not exceed the basic exemption slab of Rs 2.5 lakh. "The total interest income includes interest from other sources as well, including PPF, NSCs and not just interest income from deposits," says Sankla of H&R Block. Form 15H, which is for senior taxpayers above 60, imposes only the first condition. The final tax on the total annual income should be nil. So, senior citizens whose taxable income is below the Rs 3 lakh limit are eligible to file Form 15H. For very senior citizens above 80, this limit is Rs 5 lakh.
Though this is a standard practice, and investors take it lightly, don't assume that the Form 15G and 15H will not get noticed by the taxman. "If TDS is not deducted because the person has filed Form 15G or 15H, it is separately shown in part A1 of the Form 26AS," cautions Gupta of Cleartax.in.
Smart tip: File Forms 15G only if you fulfill both the conditions. TDS is an interim tax and you can claim a refund if you have paid more than due.
Smart tip: File Forms 15G only if you fulfill both the conditions. TDS is an interim tax and you can claim a refund if you have paid more than due.
6. Not deducting TDS when buying property
Given that real estate investments involve a lot of unaccounted money, the government has extended the scope of TDS to property transactions as well. If you buy a house worth more than Rs 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 higher at 30%. This amount should be deposited with the government on behalf of the seller using Form 26QB. Delhibased Sahay had no idea of this rule when he bought a property in Noida last year. He now has to respond to a tax notice, and could even be slapped with a penalty of up to Rs 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.
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 Rs 10 lakh for even small errors. Experts say taxpayers who have worked abroad often go wrong when reporting their foreign assets. "The employee stock options is often acquired at no cost or be be sold out during the year and therefore get missed when you take an account of your assets. Capital assets like jewellery often skips the mind as they do not generate any income. In fact, they may have been bought only as ornaments," says Ghose.
9. Not reporting tax-free income
This may not be a serious offence but a taxpayer is required to mention tax-free income in his return. Tax-free income includes interest earned on PPF, tax-free bonds, life insurance policies, capital gains from stocks and equity-oriented funds and gifts from specified relatives. "Even if you are not liable to pay any tax on these all your interest income, including savings bank interest, has to be reported in the ITR," says Gupta of Cleartax.in. The taxpayer can then claim exemption for the same. While you may not receive a notice for not mentioning tax-free income, it will certainly create an inconsistency in your return.
Similarly, dividend income has to be reported in the ITR even though it is tax-free. This year's Budget has proposed a tax on dividend income if it exceeds Rs 10 lakh. The new rule will impact HNIs who use dividend stripping strategies to earn tax-free income.
Smart tip: Mention all tax-free income in your ITR but claim exemption for it under various sections.
Given that real estate investments involve a lot of unaccounted money, the government has extended the scope of TDS to property transactions as well. If you buy a house worth more than Rs 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 higher at 30%. This amount should be deposited with the government on behalf of the seller using Form 26QB. Delhibased Sahay had no idea of this rule when he bought a property in Noida last year. He now has to respond to a tax notice, and could even be slapped with a penalty of up to Rs 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. Like Sahay, most buyers are unaware of the rule. Even if they are aware, they are not sure how to calculate the tax. "The TDS has to be calculated on the total sale price and not just the amount exceeding Rs 50 lakh. Many make this calculation error," says Gupta. 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. If a property is valued at Rs 60 lakh based on the circle rate, but gets sold for less than Rs 50 lakh, the buyer need not deduct TDS.
Also, only the sale price has to be taken into consideration, not the circle rate of the property. If a property is valued at Rs 60 lakh based on the circle rate, but gets sold for less than Rs 50 lakh, the buyer need not deduct TDS.
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.
7. Not reporting foreign assets
We usually don't want to be alarmist but this is one area where taxpayers need to tread with caution. They can no longer afford to be unsure about their foreign income and assets. "There is a lot of exchange of information between countries and we will see an exponential rise in the number of notices being sent to taxpayers on this account," says Tapati Ghose, Partner, Deloitte Haskins & Sells LLP.
7. Not reporting foreign assets
We usually don't want to be alarmist but this is one area where taxpayers need to tread with caution. They can no longer afford to be unsure about their foreign income and assets. "There is a lot of exchange of information between countries and we will see an exponential rise in the number of notices being sent to taxpayers on this account," says Tapati Ghose, Partner, Deloitte Haskins & Sells LLP.
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 Rs 10 lakh for even small errors. Experts say taxpayers who have worked abroad often go wrong when reporting their foreign assets. "The employee stock options is often acquired at no cost or be be sold out during the year and therefore get missed when you take an account of your assets. Capital assets like jewellery often skips the mind as they do not generate any income. In fact, they may have been bought only as ornaments," says Ghose.
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," says Ghose. Also, all foreign bank accounts—whether operational or not and even with a tiny balance—need to be reported. You even have to report bank accounts where you are merely a signing authority.
Smart tip: Start collecting details of your foreign assets much ..
Smart tip: Start collecting details of your foreign assets much ..
8. Disregarding clubbing provisions
It's quite common for taxpayers to invest in the name of non-working spouses or minor children. But though gifts made to a spouse or a minor child do not attract tax, if that money is invested the income it generates is clubbed with the income of the giver and taxed accordingly. So, if you bought a house in your wife's name, any income from that house, whether as capital gains when you sell it or as rent, will be treated as your income. ..
It's quite common for taxpayers to invest in the name of non-working spouses or minor children. But though gifts made to a spouse or a minor child do not attract tax, if that money is invested the income it generates is clubbed with the income of the giver and taxed accordingly. So, if you bought a house in your wife's name, any income from that house, whether as capital gains when you sell it or as rent, will be treated as your income. ..
Similarly, if a husband has invested in fixed deposits in the name of his wife, the interest will be taxed as his income. "It doesn't matter whether your spouse's income is below the basic exemption. the income from the investment will get clubbed to your income," says ghose of deloitte.
The rules are slightly different in case of investments in the name of minor children (below 18 years). The earnings are treated as the income of the parent who earns more. However, the taxman has softened the tax blow by extending an exemption of Rs 1,500 a year per child up to a maximum of two children.
Parents who want to invest in the name of their children can go for tax-free options such as the Sukanya Samriddhi Yojana, PPF or tax-free bonds. Though the income will get clubbed, there will be no tax implication. Mutual funds also help bypass the clubbing provision because the tax liability is deferred indefinitely. If the child withdraws after 18, that income is his, not the parent's.
Smart tip: Invest in tax-free options in spouse's name. Invest the income in FDs or RDs. Income is clubbed but the income from income is not.
The rules are slightly different in case of investments in the name of minor children (below 18 years). The earnings are treated as the income of the parent who earns more. However, the taxman has softened the tax blow by extending an exemption of Rs 1,500 a year per child up to a maximum of two children.
Parents who want to invest in the name of their children can go for tax-free options such as the Sukanya Samriddhi Yojana, PPF or tax-free bonds. Though the income will get clubbed, there will be no tax implication. Mutual funds also help bypass the clubbing provision because the tax liability is deferred indefinitely. If the child withdraws after 18, that income is his, not the parent's.
Smart tip: Invest in tax-free options in spouse's name. Invest the income in FDs or RDs. Income is clubbed but the income from income is not.
9. Not reporting tax-free income
This may not be a serious offence but a taxpayer is required to mention tax-free income in his return. Tax-free income includes interest earned on PPF, tax-free bonds, life insurance policies, capital gains from stocks and equity-oriented funds and gifts from specified relatives. "Even if you are not liable to pay any tax on these all your interest income, including savings bank interest, has to be reported in the ITR," says Gupta of Cleartax.in. The taxpayer can then claim exemption for the same. While you may not receive a notice for not mentioning tax-free income, it will certainly create an inconsistency in your return.
Similarly, dividend income has to be reported in the ITR even though it is tax-free. This year's Budget has proposed a tax on dividend income if it exceeds Rs 10 lakh. The new rule will impact HNIs who use dividend stripping strategies to earn tax-free income.
Smart tip: Mention all tax-free income in your ITR but claim exemption for it under various sections.
10. Spending, investing beyond means
We all know that reckless spending is not good for our financial health. But few people realise that spending too much can also lead to a tax notice. If your expenses or cash withdrawals exceed certain limits, your credit card company and your bank are supposed to report that to the tax department.
If these expenses are much beyond your reported income, the income tax department may send you a notice or pick up your case for scrutiny. "If cash transactions, including ATM withdrawals, exceed Rs 50 lakh in a year, a bank is supposed to report it," says Minal Agarwal, Chartered Accountant and Partner, Mahesh K Agarwal & Company.
We all know that reckless spending is not good for our financial health. But few people realise that spending too much can also lead to a tax notice. If your expenses or cash withdrawals exceed certain limits, your credit card company and your bank are supposed to report that to the tax department.
If these expenses are much beyond your reported income, the income tax department may send you a notice or pick up your case for scrutiny. "If cash transactions, including ATM withdrawals, exceed Rs 50 lakh in a year, a bank is supposed to report it," says Minal Agarwal, Chartered Accountant and Partner, Mahesh K Agarwal & Company.
Similarly, if investments by an individual cross certain thresholds, mutual funds, banks and brokerages are supposed to inform the tax department. If you invest more than Rs 1 lakh in stocks, your broker will squeal on you. Invest over Rs 2 lakh in a mutual fund and your name gets into a list of high-value investors.
Buy bonds worth over Rs 5 lakh and you get noticed. Even the purchase of gold, which was till now a safe haven for unaccounted money, will require your PAN card details. If these purchases and investments don't match your reported income, be ready for a tax notice. "The government is gradually getting to know all aspects of the individual's financial life," says Agarwal.
Buy bonds worth over Rs 5 lakh and you get noticed. Even the purchase of gold, which was till now a safe haven for unaccounted money, will require your PAN card details. If these purchases and investments don't match your reported income, be ready for a tax notice. "The government is gradually getting to know all aspects of the individual's financial life," says Agarwal.
Smart tip: Avoid cash transactions as far as possible. If depositing cash in bank account, keep record of source of cash.
