Common errors that affect Tax Liability

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On my way to a conference in Mumbai, I was sitting across an IT professional. Conversing with him for over 10 minutes gave me an idea about his ignorance on the taxation matters. Keeping that experience in view, I wanted to throw some light on the common errors that we commit, which might affect our tax liability and might land us into trouble with the Indian income tax authorities.

Failure to report income from other sources

Income from other sources is one of the important sources of income that one tends to generally forget as this is a residuary source of income. All income other than income from salary, house property, business or profession or capital gains is covered under “Income from Other Sources”. Apart from that, there are several types of incomes which are specifically taxed under this head such as dividends, interest from savings account, fixed deposits accounts, recurring deposits, etc, winnings from lotteries, games, gifts which are chargeable to tax are also taxed under this head.

Especially in case of interest from fixed deposits and recurring deposits, people are of the opinion that whatever tax has should be chargeable is already withheld by their banks. But it is important to note that Banks are liable to withheld only 10% of interest and the balance is to be reported and paid off later (if tax liability is more based on applicable slab rate)

Failure to report income from minor child

Parents generally invest in the name of their minor children. Income earned therefrom in any form is taxable in the hands of either of the parents, whosoever’s income is higher. A small exemption of INR 1500 for each minor child is provided in case of clubbing of income with the Parents. Only exception to this rule if when minor children earns any kind of income due to their own skill, talent or knowledge. However, many people are not aware of these clubbing provisions. They are of the opinion that since the investments are in the name of their minor children, any income arising therefrom belongs to the children and not the parents. This thought can land people in trouble subsequently.

Failure to report exempt income

Exempt income may be in the form of dividend, long term capital gain on equities, interest on provident fund, etc. As the Income Tax Department specifically asks for the details of exempt income, failure to report such income may lead to unnecessary nuisances in future as the department would get suspicious of the reason behind non-reporting.

Mistakes in claiming tax benefits

There are various benefits provided in terms of tax deductions and reliefs. However, there are conditions attached thereto which requires to be fulfilled strictly. For instance, in case of deduction available under 80G (for donations, etc), one needs to state the PAN and complete details of the organization to which the donation is provided. If you have not stated the same in your income tax return, then you are bound to get an intimation from the income tax department disallowing the same.

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Discrepancy in TDS details

I always tell my team to look into Form 26AS before filing returns as any discrepancy can lead to further troubles.

Form 26AS is basically a summary of your taxes deducted at source, advance taxes paid and self-assessment tax paid during the tax year. Income tax department will generally allow a taxpayer to claim the credit of taxes as reflecting in his form 26AS as this is maintained by the income tax department. It can be easily assessed by logging into your income tax portal with the help of your user id (PAN), date of birth and password. If any discrepancy is observed, then suitable action should be taken to reconcile it. Every person deducting tax at source has to furnish the details of tax deducted by him to the Income tax department. On the basis of such details of tax deducted at source by the deductor, the Income tax department update its Form 26AS of the Deductee. Many times, it may happen that the TDS credit appearing in Form 26AS may not tally with the actual tax deducted at source. This mainly happens due to reasons such as non-furnishing of TDS details to the Income tax department by the deductor, deducting the tax in incorrect PAN, etc. In such cases, it is advised that the Deductee should approach the deductor and request him to take the necessary steps to rectify the discrepancy due to the above reasons.

Miscalculation or Computational errors

Confirm the calculation of total income, deductions (if any), interest (if any), tax liability/refund, etc.

Be careful while calculating surcharge and education cess. It is to be noted that the rate of surcharge has increased from 12% to 15% for the Assessment Year 2017-18 for individuals and is only applied if the taxable income exceeds INR 1 crore. Further, education cess is applied on the aggregate of income tax and surcharge, if applicable.

Recent amendments in Budget 2017

Rates of Income Tax

In case of individuals, Hindu Undivided Families, Association of Persons, Body of Individuals, Artificial Juridical Person

ParticularsTax Rates
Where the taxable income doesn't exceed INR 250,000NIL
Where the taxable income exceeds INR 250,000 but does not exceed INR 500,0005% of the amount by which the taxable income exceeds INR 250,000
Where the taxable income exceeds INR 500,000 but does not exceed INR 10,00,000INR 12,500 + 20% of the amount by which the taxable income exceeds INR 500,000
Where the total income exceeds INR 10,00,000INR 112,500 + 30% of the amount by which the taxable income exceeds INR 10,00,000
Surcharge of 15% of the income tax, where taxable income is more than INR 1 crore
Education cess of 3% of the total of income tax and surcharge, if applicable

Surcharge rate increased

Taxpayers who are earning between INR 50 lakhs to INR 1 crore have to pay an additional surcharge of 10% on their total income which was not the case earlier. However, there has been no change in the surcharge which is additionally levied at 15% whose income is above INR 1 crore.

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Reduction in rebate from income tax payable

The rebate from income tax payable to a resident individual is being reduced from existing INR 5,000 to INR 2,500 for a resident individual whose total income does not exceed INR 350,000.

Misspelled names, incorrect bank details

Ensure that other details like PAN, address, e-mail address, bank account details, etc., are correct. Bank details are very important in case of processing of refunds. Thus, be cautious about the same. Furthermore, after filling all the details in the return of income, re-confirm all the details. Only once you do that, proceed with filing the return of income.

Ignoring income from old job

Every time an individual switches jobs, there is higher possibility that the new employer doesn’t take into account the income earned from the previous job and offers tax exemption and deduction to the employee all over again. Instead of INR 250,000 basic exemption and INR 150,000 deduction for tax saving investments under Section 80C, he gets INR 500,000 basic exemption and INR 300,000 deduction. Obviously, he will be paying much less tax than he ought to. Thus, there are interest liability when you finally have to pay taxes at the time of filing of the income tax returns.

Filing belated returns or not filing tax returns at all

Taxpayers should avoid the practice of filing belated return. Following are the consequences of delay in filing the return of income:

  • Loss (other than house property loss) cannot be carried forward.
  • Levy of interest under section 234A for late filing of return.
  • Penalty of INR 5,000 under section 271F can be levied.
  • Various exemptions/deductions under section 10A, section 10B, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID and 80-IE are not available.

Belated return cannot be revised under section 139(5). However, w.e.f. 01-04-2017, income-tax return for the Assessment Year 2017-18 and onwards filed under section 139(1) or section 139(4), i.e. belated return can also be revised.

Assessment Year is the year immediately following the financial year, in which income is assessed and taxes are paid thereupon. For instance, income is earned during the period April 1, 2015 to March 31, 2016. Now income tax on income earned during this period would be paid during the year April 1, 2016 to March 31, 2017, i.e. on or before July 31, 2016.

The following are the due dates of filing of return of income/loss:

S.NoStatus of TaxpayerDue date
1.Any company other than a company who is required to furnish a report in Form No. 3CEB under Section 92ESeptember 30 of the Assessment Year
2.Any person (may be corporate/ non-corporate) who is required to furnish a report in Form No. 3CEB under Section 92ENovember 30 of the Assessment Year
3.Any person (other than a company) whose accounts are to be audited under the Income-tax law or under any other lawSeptember 30 of the Assessment Year
4.A working partner of a firm whose accounts are required to be audited under this Act or under any other LawSeptember 30 of the Assessment Year
5.Any other assesseeJuly 31 of the Assessment Year

However, if you have failed to file the return of income on or before the due dates as discussed above, then you can file a belated return. With effect from April 1, 2017, belated income tax return for the Assessment Year 2017-18 and onwards can be filed at any time before the end of the relevant Assessment Year or before the completion of the assessment, whichever is earlier. It should be kept in mind that even though you are allowed to file a belated income tax return within the prescribed period, filing after the due date does attract interest and penalties.

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Failure to file Income Tax Return:

If you have not furnished the return within the due date, you will have to pay interest on tax due. If the return is not filed up to the end of the assessment year, in addition to interest, a penalty of INR 5,000/ 10,000 shall be levied under section 271F.

Recent amendment in Budget 2017

Penalty for delayed filing of return of income has been amended as follows:

  • From due date till 31st December- INR 5,000
  • In any other case- INR 10,000

Misusing forms 15G, 15H to avoid tax

There are various instances where taxpayers, in order to save their taxes to be deducted at source, furnish declarations in Form 15G/15H declaring that their tax liability would be below the exemption limit. However, misuse of these forms is a serious offence and it should be avoided at all means.

Form No. 15G is for the individual or a person (other than company or firm) and Form No. 15H is for the senior citizens.

Not deducting TDS when buying property

Recently, government had introduced provisions for deduction of tax at source in case of payment of sale consideration of immovable property (other than rural agricultural land) to a resident. This provision is not applicable if the seller is a non-resident. Tax is to be deducted @ 1%. No tax is to be deducted if the consideration is below INR 50,00,000. If the sale consideration exceeds INR 50,00,000, then tax is to be deducted on the entire amount and not only on the amount exceeding INR 50,00,000. The rule is applicable even if you pay in instalments. In such cases, the tax needs to be deducted from each payment and the money deposited with the government within seven days.

Not reporting foreign assets

In the recent times, we all have encountered how aggressive the tax department has become, especially in matters relating to unaccounted money or black money. Mis-reporting overseas assets will not be taken lightly by the government either. You could be prosecuted under the Black Money Act and the penalty can be as high as INR 10 lakh for even small errors. Thus, it is suggested that you start collecting records of your foreign assets, way before the due date of tax return.

Details of assets and liabilities for individuals who are earning income over 50 lakhs

It must be noted that Individuals and Hindu Undivided Families with income above a specified limit, filing returns in ITR 3 and ITR 4 were already required to furnish information of their assets and liabilities in their annual return of income. With Assessment Year 2016-17, Individuals and Hindu Undivided Families filing their returns of income in ITR 1, ITR 2, ITR 2A and ITR 4S, having income exceeding INR 50 lacs would now be required to furnish information regarding Assets and Liabilities in Schedule AL of the relevant form.