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Avoid these common mistakes in income tax, keep tax notice at bay

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.

A notice from income tax department is a reason for taxpayer’s worry. There are few common mistakes which invites a call from income tax department. Thus, knowing these mistakes could help you avoid income tax notices.

  1. Not reporting interest incomes

One should report all the interest incomes received or accrued due to him in the previous financial year (for which the return is being filed) while filing his tax returns. Not reporting of interest income from bank and other sources is one of the most prominent reasons resulting in issue of income tax notice. Income tax department gets information of interest, commission & other income of the depositor from multiple sources. Non- reporting results in automatic issue of notices by the income tax system.

Smart tip: Calculate how much interest you will get on your FDs, RDs and other fixed income investments and add that to your income.

  1. Not filing income tax returns

Individual are required to file the income tax return only if income exceeds the basic exemption limit. Lot many taxpayers don’t file the return presuming that return is mandatory only if they have the tax liability. For instance, a person with a salary income of INR 4 Lakh and 80C deduction of INR 1.50 Lakh is required to file the return of income as income is above basic exemption limit even though the tax liability is Nil. Non- filing of return results in notice. It is advisable to file the income tax return even if the income is below basic exemption limit if they have carried out any high value transactions, as it will enable them to avoid income tax notice.

Further, many people don’t file their income tax returns because they have long term capital gains which are tax-exempt and without this their gross total income is below the tax-exempt income level. However, as per recent amendments in section 139 (1) of the Act, if your exempted long term capital gains along with gross total income exceeds the minimum exemption level, you are required to file your income tax return.

Smart tip: Do not miss filing your return even if your tax is zero or all your taxes are paid. File online to avoid mistakes.

  1. Non reporting of tax free incomes

As a taxpayer, you are duty bound to report all your income even if some is tax-free. One of the reasons for income tax notice is that the investment by taxpayer is not in accordance with the income profile of the taxpayer. There are lot many taxpayers who don’t discloses exempt income on the pretext that it don’t have any tax implications. Exempt income includes income such as LIC money back, PPF withdrawals, ELSS withdrawals etc. Often the amount of exempt income is in lump sum and invested back by the taxpayers in other investment avenues. By disclosing exempt income, taxmen are automatically able to link the source of new investment from exempt income. Disclosure of exempt income in ITR forms also could be treated as
self-explanatory for the spending of the taxpayers towards foreign travel, credit card & other spending. Thus, these exempt incomes are to be reported in the ‘Exempt Income’ schedule of the ITR and you can claim exemption on these under various sections of the Income Tax Act.

Smart tip: Mention all tax-free income in your ITR but claim exemption for it under various sections.

  1. Verify 26AS before filing tax return

26AS is a taxpayer’s statement showing the data of the assessee available with the income tax department. Taxpayer should verify that their return incorporates the data available in 26AS. Taxpayer should take efforts to rectify 26AS in case it contains entry not related to him. Taxpayer can avoid notices by verifying 26AS before filing income tax return.

Smart tip: Verify 26AS before filing income tax return.

  1. Non reporting of transaction in Income Tax Return

Non reporting of transactions in income tax return form is one of the most prominent reasons for inviting income tax notices. Even though the transaction has resulted in loss, it is better to disclose the loss figure in income tax return to avoid notices. These types of incidents are often there in shares, mutual funds & property. Be careful, disclose & avoid unwanted notice from income tax department.

Smart tip: Report all transactions including the transactions resulting in losses in income tax return.

  1. Misusing forms 15G / 15H to avoid TDS

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. These are now required to be e-filed by the banks & other recipient. As a result, the income tax systems have handy information of all the taxpayers who have wrongly filed the declaration form. Taxpayers submitting this form in a casual way started receiving notice from the income tax department. Further, misuse of these forms is a serious offence. A false declaration not only attracts penalty but also prosecution.

Smart tip: File Forms 15G only if you fulfil both the conditions i.e. your taxable income for the year does not exceed the basic exemption of INR 2.5 Lakh and the total interest received during the financial year does not exceed the basic exemption slab of INR 2.5 Lakh. TDS is an interim tax and you can claim a refund if you have paid more than due.

  1. Non deduction of TDS

TDS net is widening to include individual taxpayers who are not in any kind of business or profession. Now, purchase of property above INR 50 Lakh attracts TDS. 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.

In addition, payment of rent exceeding INR 50,000 p.a. also attracts TDS. Non-deduction or non-filing of the TDS return after deduction / payment invites notice from the revenue office.

Smart tip: Make it clear to the seller of property / property owner that you will be deducting TDS from the payment. Make sure you have his correct PAN details.

  1. Non reporting of Cash deposit

Change in income tax return forms is an annual feature. This year, income tax return form required taxpayer to disclose the amount of cash deposited in a bank account. Also, 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. Thus, income tax systems have already received the information from the banks of all the taxpayers regarding their cash deposits. Taxpayers with heavy cash deposits or unmatched data are catching an eye of income tax and the income tax department may send a notice or pick up such cases for scrutiny.

Smart tip: Avoid cash transactions as far as possible. If depositing cash in bank account, keep record of source of cash.

Thus, precisely don’t forget to incorporate all the income details in income tax return. Don’t fail to file the income tax return. Disclose all the transactions, mainly of shares & property. Don’t be casual in submission of Form No. 15G / 15H. Be updated about the changing tax laws, more particularly about the TDS provision on property & rent & deduct proper TDS. Report all income. Disclose all the bank accounts correctly with cash deposits figure. Verify 26AS before filing income tax return & be a happy taxpayer.

For a more detailed discussion on income tax issues, or to obtain further assistance in personal income tax filings, corporate tax filings, tax planning, income tax assessments, response to income tax notices, please contact AJSH & Co LLP. If you have any query regarding this Click Here.