Don’t Ignore These Incomes While Filing Your ITR
Nobody will raise an eyebrow if you give incorrect information to a tax adviser. But all hell could break loose if you make the same mistake in your income tax return (ITR). Interest income from bank deposits, bonds and most post office schemes is fully taxable. It has to be declared in the “Income From Other Sources” section in the ITR.
However, tax filing portal Taxspanner found that almost 80% of taxpayers who filed their returns do not report any interest income. “Not declaring this income amounts to tax evasion and could fetch a notice from the tax department,” says Sudhir Kaushik, Co-founder and CFO, Taxspanner.com.
Things become more serious if the undeclared income is substantial and tax has not been paid on it. The taxpayer could be slapped with a late payment penalty. Many taxpayers are under the misconception that if TDS has been deducted on their fixed deposits, they don’t have to pay more tax. “TDS is not the end of your tax liability,” says Kaushik. It is only 10% of the interest income. If the taxpayer falls in a higher tax slab, he must pay additional tax.
Savings bank interest
Some of the confusion here is due to the tax relief extended to savings bank interest. Under Section 80TTA, up to Rs 10,000 interest earned on the savings bank account is tax free. Only the interest exceeding Rs 10,000 is liable to tax. This is a very high threshold because at 4% interest, you will earn Rs 10,000 interest only if you let Rs 2.5 lakh idle in your savings bank account for a year. In other words, most small taxpayers will not hit that threshold of exempt income. Even so, this income too has to be reported.
Reporting tax-free income
While interest from bank deposits is fully taxable and savings bank interest partially taxable, even tax-free incomes have to be declared. “Amounts credited to your bank account on maturity of the PPF or as interest on tax-free bonds must be duly reported in the return,” says Archit Gupta, Founder and CEO, Cleartax.in. In ITR-1, there is a separate section for disclosing exempt income. In other forms, this must be reported under Schedule EI (Exempt Income).
Similarly, while dividends up to Rs 10 lakh are tax free under Section 10(34) and income from a life insurance policy is tax free under Section 10(10d), these incomes must be reported in the tax form. While most taxpayers ignore small sums of exempt income, experts say large amounts should be declared. “Disclosing this income in the return helps create a trail and gives the taxpayer ready explanation for investment or use of such money in future,” says Gupta.
This assumes greater importance because when you make high-value investments or purchases, the transaction is reported to the tax authorities. If you buy a car worth Rs 8-10 lakh or book a flat with a Rs 10-15 lakh downpayment or even invest a large amount in stocks or mutual funds, the car dealer, real estate developer and stocks broker is supposed to inform the tax department. You will find it easier to explain the source of funds if you declare them in the tax form. Taxpayers are also required to mention tax-free capital gains. “Tax filing is mandatory for those who do not have taxable income but have exempt LTCG of Rs 2.5 lakh or more,” says Gupta.
Incomes that need to be reported
Scrutiny by tax department
Ignore this advice at your own peril. The tax department is putting all deductions and exemptions under the scanner. “The finance minister has stated that salaried taxpayers who claim fake exemptions and deduction, especially HRA, would be caught,” warns Kaushik. Salaried employees who claim exemption for HRA have to furnish the PAN of the landlord if the exemption exceeds Rs 1 lakh. If above Rs 50,000 a month, they also have to deduct TDS on the rent.
Gupta says tax forms now ask for a detailed breakup of salary, including allowances which are exempt under Section 10. “Specific fields have been provided for all other types of exempt income, including capital gains,” he says.