Are you among the more than two crore taxpayers who filed their returns before 31 July? These taxpayers can rest easy because they filed by the due date. However, the dread of the taxman does not end here. It is common for taxpayers to make errors or deliberately conceal income in their returns, which could lead to notices from the tax department. Nudged by the government to enhance revenue collections, the tax authorities are on an overdrive to catch tax evaders. Not only are financial transactions being tracked, but loopholes that allowed tax evasion are also being plugged.
In October 2013, the Central Board of Direct Taxes issued a new rule for claiming HRA exemption. Salaried taxpayers claiming HRA exemption were asked to report their landlord’s PAN if the total rent in a year exceeded Rs 1 lakh. Earlier, if the total rent paid was less than Rs 15,000 a month, there was no need to submit the landlord’s PAN details.
What is a tax scrutiny?
Scrutiny essentially means evaluating the income tax return for its authenticity. Typically, if a return is picked up for scrutiny, a notice will be served within a period of one year from the month in which the return was filed.
WHAT THE TAXMAN WILL CHECK:
> Bank statements, credit card statements
> Form 16
> Details of your family members who live with you
> Withdrawals and expenses, including those through credit cards
> Any interest-free loans you might have given
The declaration of interest income is the most common mistake that taxpayers make.
The interest earned on bank fixed deposits, recurring deposits and infrastructure bonds is fully taxable but many taxpayers skip mentioning it in their tax return. Some think that the newly introduced exemption for bank interest makes this income tax-free. But the exemption under Section 80TTA is only for the interest on your savings bank balance. Interest from other sources, including 5-year tax saving bank fixed deposits, is fully taxable.
Clubbing income of minor child, spouse
Your earning is not the only income you need to declare in your tax return. If you invested in the name of your minor child or gave money to your spouse for investing, the income from such investments will also be treated as your income. Any income of a minor child (below 18 years) is clubbed with the income of the parent who earns more. There is a tiny deduction of Rs 1,500 per child for up to two children in a year.
Similarly, if you have invested in your spouse’s name, the income will be treated as your income and taxed at the applicable rate. If you bought a house in your wife’s name and rented it out, the rent will be treated as your income, not hers. Even if the house is transferred to the wife as the gift, this principle would apply. “The entire income would have to be included in the tax working of the original holder of the asset,” says Kuldip Kumar, executive director, PwC.
In rare cases, where the spouse is given a remuneration for working in the taxpayer’s business, the money given to the spouse will not get clubbed. For instance, if your chartered accountant wife maintains the accounts of your business and you pay her a remuneration which she invests, the income will not be clubbed. But she should have the required qualifications to do the work she is being paid for. “The onus is squarely on the taxpayer. You should be able to prove that your spouse is hired in a professional capacity, not otherwise,” says Sandeep Shanbhag, director, Wonderland Consultants.
Not filing tax return
This is another common mistake. Many taxpayers believe that since their salary is subject toTDS, they don’t have to file returns. That’s not true. If your income exceeds Rs 2 lakh, you have to file your return. Even if the tax liability is reduced to zero after deduction under Section 80C, the return has to be filed. The government has identified the category of non-filers as a key one for tapping unpaid taxes. Last year, the Income Tax Department sent 12 lakh notices for non-filing of taxes.
Non-filers are not the only ones who may get such a notice. Many taxpayers file their returns online but don’t complete the process. “A lot of them forget to send the physical copy of the ITR V to the tax department,” says Sudhir Kaushik, co-founder and CFO, Taxspanner.com. A taxpayer must submit the ITR V to the Centralised Processing Centre in Bangalore within 120 days of uploading his return. “Until you submit the IT return to the authorities physically and get the acknowledgment of receipt, the return you filed will be treated as invalid,” says Kaushik.
Not spending enough
The taxman also gets suspicious if you are investing too much or withdrawing too little. A Mumbai-based individual was asked to explain how she was sustaining herself because her entire salary was flowing into investments.She was using the cash allowances received from her employer for her day-to-day needs and investing the entire salary that came by cheque.
“The tax officer will estimate the household expenditure you are likely to incur based on your earning capacity, family size, lifestyle and number of earning members. If your bank statement does not show commensurate withdrawals for expenses, the question will arise how you are surviving on so little,” says Manish Shah, partner, S K Parekh & Company. If you are using cash for purchases and not withdrawing from your bank account, the taxman will assume that you have undeclared sources of income.
The taxman can question not only your income but also the expenses claimed. If allowances are being used for day-to-day expenses, it means the taxpayer submitted bogus receipts to claim those allowances. “If you stay in your parents’ house and claim HRA exemption for the rent paid to them, your bank statement should be able to validate the payment of rent,” says Kumar.
The other big fallacy is the TDS. Banks deduct 10 per cent TDS if the interest exceeds Rs 10,000 in a year. If the income is below Rs 10,000 and TDS has not been deducted, you have to add the interest to your total taxable income and accordingly pay tax. Even if TDS has been deducted, it does not mean that your tax liability is taken care of. If you are in the 20-30 per cent tax bracket, you are required to pay more tax on the income.
Don’t think you can get away by concealing this income. “Failure to report this is tantamount to concealment of income. The tax authorities can easily detect it as the bank has already deducted the TDS and reported the same along with your PAN details,” says Kirit Sanghvi, senior partner, K S Sanghvi & Co.
Also, in case of recurring deposits, no TDS is deducted, irrespective of the quantum of the interest, but the interest income is still fully taxable. Similarly, the interest earned on NSCs and infrastructure bonds is taxable.
Some taxpayers feel safe from the prying eyes of the taxman if they put money in coperative banks. Till now, interest from fixed deposits in cooperative banks was exempt from TDS. However, there is a rude shock waiting for such taxpayers this year. The Karnataka Income Tax Tribunal recently ruled that if the interest exceeded Rs 10,000 in a year, it must be subjected to TDS. Following this, several cooperative banks have received notices from the Income Tax Department asking them to deduct tax for the year 2013-14.
That’s not the only count on which taxpayers go wrong on interest. Even the interest from tax-free instruments, such as the PPF and tax-free bonds, has to be reported in your return. However, this is not a serious transgression and the taxman won’t come after you with hammer and tongs if you skipped mentioning this income.
Not filing wealth tax return
Apart from income tax, you may also be liable to pay wealth tax. Most people are blissfully unaware that if they own certain assets, including jewellery, gold or silver bullion, vacant house, non-agricultural land, costly watches, luxury cars and paintings, they have to shell out wealth tax. If the aggregate value of these assets exceeds Rs 30 lakh, they have to pay 1 per cent of the amount by which it exceeds Rs 30 lakh. This also includes cash worth over Rs 50,000.
A taxpayer must file his wealth tax return for the same. “One house is exempt from wealth tax. Also, if you have rented out your second home for more than 300 days in the year, it will also be exempt,” says Kumar. Also, if the property is used to conduct business, then it is not included for computation of wealth tax.
Any loan outstanding against the house will also be subtracted from the market value of the house. However, the valuation of these items is a tedious process. “Only government approved valuers can be approached in this regard,” says Kaushik. Perhaps that is why the tax authorities have gone relatively soft on implementing wealth tax provisions so far.
Wealth tax is minuscule in the total revenue collection — it accounts for less than 0.25 per cent of the total direct taxes collected. This doesn’t mean the taxman will not go after you for not paying it. There is a stiff penalty for evading wealth tax. Incorrect declaration of wealth can invite a fine of up to 500 per cent of the evaded tax. One can also be jailed for up to seven years if the tax due is over Rs 1 lakh.
Reversal of Section 80C benefit
For salaried employees in the organised sector, the Employee Provident Fund (EPF) is a great way to save for retirement, but for some, it can also be the reason for a tax notice. Many people withdraw their Provident Fund when they change jobs. The monthly contribution to the EPF is eligible for deduction under Section 80C. If the balance is withdrawn within five years of joining the organisation, the entire deduction claimed in previous years will be reversed. “The amount claimed as deduction will have to be added back to your income for the year in which withdrawal takes place,” says Shah. Similarly, if you junk a life insurance policy within two years of buying, the tax benefits claimed under Section 80C will be reversed.
The same holds true if you sell a house within five years. If you availed of tax benefits on the loan, all the deductions claimed in the previous years, including on principal repayment and payment of stamp duty along with registration fees, will be added to the taxable income of the year in which you sell the house.
Since the onus of reversing the benefit and paying the tax for the previous years is on the taxpayer, many people will conveniently skip mentioning it in their tax return. “These issues are not likely to be picked up by the taxman in isolation,” says Sanghavi. “But in case your return is picked up for scrutiny, the investigating officer may come across these facts,” he adds.
Items received as gifts
Diamonds are a girl’s best friend, but if you gift a solitaire diamond ring worth Rs 1 lakh to your friend, she might end up paying a huge tax on it. Gifts from unrelated people are taxable if the aggregate value exceeds Rs 50,000 in a year. “Even gifts received collectively, such as on a birthday or anniversary, but whose combined value exceeds Rs 50,000, will invite tax,” says Kumar. The gifts received from blood relatives or on specific ocassions like marriage or under inheritance or by will are not taxable.
The specific assets for which gift tax is applicable include cash, immovable property such as land and buildings, and movable property including financial assets (shares, fixed deposits), jewellery and bullion, art and antiques (paintings, sculptures). Since such instances of gifting occur regularly in our lives, it is a must that one is aware of the tax implications of such activities. “Even when you are the one who is gifting money, you may come under the scanner if the recipient of the gift happens to come under scrutiny,” cautions Sanghvi.
How to deal with a tax notice
Here is a checklist of things to do when you get a notice.
> Preserve envelope
The envelope has the Speed Post number, which shows when the notice was posted and served.
> Check PAN details
Maybe the notice was meant for someone with same name. Check your PAN details.
> Make copies of notice
You can’t afford to lose the notice, so make photocopies or scan and store it on your computer.
> Check validity
A notice under Section 143(3) for scrutiny assessment has to be served within six months of the end of the financial year in which the return was filed. If served later, it will be deemed invalid. However, a notice served under Section 148 can reopen a case even up to six years if the assessing officer (AO) suspects evasion. If the sum is less than Rs 1 lakh, only 4-year-old returns can be reopened.
> Check sender’s details
A notice must have the name, designation, sign, stamp and official address of the sender.
> Organise documents
Some returns are picked up for scrutiny at random. Don’t panic, but compile all documents.
> Seek professional help
If it is just a simple demand notice for excess tax, an individual can handle it himself. If the matter is a little complicated, it is best to take a professional’s help. You may be required to appear before the AO to explain any discrepancy in the return or make a clarification. A professional can help you organise your response so that you can provide cogent and specific clarifications.
Our intention is not to alarm our readers. If you have missed some income in your tax return or made a mistake in calculating your tax liability, we suggest you file a revised return. You might have to shell out a small amount in tax, but you will be able to sleep easy. You can revise your return as many times as you want. However, a revised return can be filed only if you filed the original return before the 31 July deadline. Now, here’s one more reason to file your tax return on time.
Source: Economics TIme