A lot of people commit mistakes while filing their income tax returns (ITR) every year. Here are the most common mistakes made by individuals while filing taxes. While some of these mistakes would end up in you getting a notice from the income-tax department, others would expose you to risks. Also, some of the myths about taxation have been decoded here, which lead you to committing a mistake.
Not reporting income from previous employer: Every employer deducts tax on the basis of the employee’s annual salary. While computing the total tax to be deducted at source (TDS), employers provide the benefit of basic exemption and deductions to the employee. If one changes jobs during the year, he will get the benefits from both the employers and, hence, less TDS would be deducted from his salary. This leads to additional tax liability at the time of filing return.
If you do not report income from your previous employer, you will get an income-tax notice when the TDS data is reconciled with your return data.
Not reporting bank interest income: It is a common misconception that interest income from savings or fixed deposit accounts is not taxable, or that tax is deducted by the bank. But banks only deduct 10% TDS on interest income, and you may be in the 30% tax slab. The income-tax department has recently started reconciliation of TDS data received from banks and the interest income reported by individuals in their returns. Non-reporting of interest income is a definite reason to receive a notice.
Signing blank ITR forms: Many people hand over the photocopy (or even the original) of their documents to a consultant and sign a blank ITR form. This is dangerous from the data confidentiality perspective. Also, the practice leads to errors. Poor handwriting and manual computations can be some reasons.
Besides, you may not get a chance to review it before the return is filed. If you think your consultant is liable for any error, that is not the case. Always keep a copy of your ITR form.
Tax liability on selling house within five years: Any instalment or part payment of the due amount under self-financing schemes, such as Delhi Development Authority, is allowed as deduction under section 80C. You can also claim deduction for repayment of the principal amount of a home loan. Deduction is also allowed on stamp duty, registration fee, or other transfer expenses incurred during the purchase/construction of a property. But if you sell this house within five years of getting possession, then all the 80C deductions claimed on this house would be deemed to be income in that particular year and you need to pay income-tax on it.
Not filing returns at all: Every individual has to necessarily file the return of income-tax if his/her total income, before allowing any deduction, exceeds the exemption limit.
But even if your income is below the exemption limit, which is common during the beginning of one’s career, you should always file the income tax returns as it will help you in the documentation process if you are taking a loan or are applying for a visa.
Not preparing books of accounts: A lot of insurance agents file returns primarily to claim tax refund for TDS, which gets deducted from their commission income. Commission income falls under the head “income from business or profession” and agents should file their return in ITR-4. Not preparing the balance sheet and profit and loss statement is wrong and may lead to non-compliance in many cases. So, even though ITR-4 is a complex 22-page form, prepare books of accounts and reconcile it with your bank statement.
Providing incorrect email address: Since all communication by the income-tax department is now done via email, one should make sure you have provided a valid and functional email address.
Tax impact of the timing of capital gain/loss: Long-term capital loss from sale of listed securities can neither be set off against any other income, nor can be carried forward. This is due to the fact that long-term capital gains income is exempt from income-tax. You can sell listed equity shares within a year and realize short-term capital loss. So, utilize the short-term capital loss to either offset other short-term gains, such as sale of house property or shares, or carry the loss forward to future years. Another important point regarding the timing of capital gain is that you need to pay advance tax if you realize any capital gains during the year. Otherwise, you will be liable for interest penalty when you file your return.
Not reporting exempt income: Several incomes, such as dividends and long-term capital gains on listed securities, are exempt from tax. Even though you do not need to pay any tax on these incomes, you must report these in your tax return since the incomes would be reported by the companies and brokerage firms. Or, be prepared for a notice.
Ankur Sharma is director, TaxSpanner.com. Your comments, questions and reactions to this column are welcome at firstname.lastname@example.org