Do you think you are safe from Tax notice even if you don’t have wads of cash stuffed under your pillow or investments in benami properties there are other reasons why you (small taxpayers) can get into troubles with Tax Authorities. Most of these mistakes happen because of the lack of tax knowledge which means not knowing that such a rule exists. Listed below are the ten most common mistakes that can fetch you a tax notice.
1. Not Reporting Interest Income
This is a very common mistake. Interest income from fixed deposits, recurring deposits, tax saving bank deposits and infrastructure bonds is fully taxable. A majority of the people believe that interest income up to Rs 10000 a year is tax free while it only applies to interest earned on the balance in a savings bank account. The best way to avoid this particular issue is by calculating how much interest you will get on your FDs, RDs and other fixed income investments and add that to your income.
Smart tip: Calculate how much interest you will get on your FDs, RDs and other fixed income investments and add that to your income.
2. Ignoring Income of Old Job
When an individual switches jobs there is a chance 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 provides tax exemption and deduction to the employee all over again. But this discrepancy wont remain hidden for long and would eventually be would be discovered when the taxpayer files his return and then would be subjected to a pay a bigger amount for tax. The smartest way to avoid this mistake is to inform your new employer about income from previous job so that the TDS is cut accordingly.
Smart tip: Inform your new employer about income from previous job so that the TDS is cut accordingly.
3. Not filing tax returns:
People below 60 will have to file returns above an income to Rs 2,50,000 People above 60 will have to file returns above an income to Rs 3,00,000 People above 80 will have to file returns above an income to Rs 5,00,000 Even if your tax is 0 for a particular accounting year but your income is higher than these values, even then you have to file your returns.
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 you sell your house before 5 years then all your tax benefits you get at the time of purchase will be reversed and you will come under heavy tax liability.
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:
To avoid taxes people sometimes split their income into two or more bank accounts and fill Form 15G or 15H and submit to their respective banks asking them not to deduct TDS. 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. 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.
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:
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.
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:
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.
Smart tip: Start collecting details of your foreign assets much before the last date for filing returns.
8. Disregarding clubbing provisions:
Parents who want to invest in the name of their children can go for tax-free options such as the SukanyaSamriddhiYojana, PPF or tax-free bonds. Though the income will get clubbed, there will be no tax implication.
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:
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.
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.
Smart tip: Avoid cash transactions as far as possible. If depositing cash in bank account, keep record of source of cash.