Some common mistakes that taxpayers often make while filing income tax returns are listed below. These errors could result in problems or a tax notice for the tax payers later on. Consequently, it is best to avoid them.
Here are some of the mistakes that are often made by the taxpayers.
1. Filing ITR using the wrong form
As per tax laws, an individual is required to report all sources of income and file the income tax return using the correct form applicable to him. If he files his tax return, using a wrong ITR form, then his filed return will be treated as ‘defective’ and he will be asked to file a revised ITR using correct form.
“In this case, the taxpayer will get some time to rectify the mistake. A rectified return (in response to notice u/s 139(9)) must be filed within 15 days from the date of receipt of the intimation under section 139(9). This time limit may be extended by the assessing officer on an application by the assessee. If the defect is not rectified within the time limit, then the assessing officer will treat it as an invalid return. In other word, it is same as not filing a return at all. Moreover, the person may face all the penalties related to not filing of ITR in addition to payment of interest u/s 234A for the delay in filing the tax return” says Chetan Chandak, Head of Tax Research, H&R Block, India.
2. Not reporting interest incomes
One should report all the interest incomes received or accrued due to him in the previous financial year (for which the return is being filed) while filing his tax returns. Individuals generally forget to report interest earned from savings bank account, fixed deposits, recurring deposits, etc. under the head ‘Income from other sources’.
While interest received or accrued on fixed and recurring deposits are fully taxable, one can claim tax relief on interest earned from the savings bank account upto a certain limit. Section 80TTA of the Income Tax Act provides that interest upto Rs 10,000 can be deducted from the total interest earned in a year from bank and post office savings account after arriving at the gross total income. “Further if they have a saving account with any Post office then interest from such account is exempt up to Rs. 3500 (in individual account) and Rs. 7000 (in a joint account) under section 10(15)(i). This is in addition to 80TTA deduction” says Chandak.
3. Not filing income tax returns
Many people don’t file their income tax returns because they have long term capital gains which are tax-exempt and without this their gross total income is below the tax-exempt income level.
However, as per recent amendments in section 139 (1) of the Act, if your exempted long term capital gains along with gross total income exceeds the minimum exemption level, you are required to file your income tax return.
For instance, let us assume that in a financial year your gross total income is Rs 1 lakh and long term exempted capital gains is Rs 2 lakh. Earlier you were not required to file income tax return as your total income was below the minimum exemption limit of Rs 2.5 lakh.
Now due to the recent amendment in tax laws, you are required to file ITR as your gross total income plus long term capital gains (Rs 1 lakh + Rs 2 lakh > Rs. 2.5 lakh) exceeds the minimum exemption limit.
4. Not clubbing incomes
As per the rules of clubbing of Income, a taxpayer is required to add income of specified persons (minor children, spouse, son’s spouse, etc.) to his own income and the tax payable by him is calculated on the total of this these two incomes. This is mostly the case when the income of minor child is added to the income of his/her parent. Section 60 to 64 of the Income Tax Act specifies the provision of clubbing of incomes. “In the case where minor’s income gets clubbed with that of any parent, he/she can claim exemption up to Rs. 1,500 under section 10(32). In case if you miss reporting this income (of minor child) you may have to pay the tax due, along with interest and you may even be subjected to a penalty of 50% for under reporting or 200% for mis-reporting of your income (up to A.Y. 2016-17 this penalty was 100-300% of the taxes avoided)”, says Chandak.
5. Not reporting income from the last job
If you have switched jobs in a financial year then income from your previous job must be reported while filing income tax return along with income from the current job. If any income (from previous job) is not reported, then a discrepancy is bound to reflect in your TDS certificates, Form 16 and Form 26AS. This is bound to bring you taxman to your door. “Again the penalties are same as not clubbing of income”, says Chandak.
6. Not reporting tax free incomes
As a taxpayer, you are duty bound to report all your income even if some is tax free. Interest earned from provident fund or/and tax-free bonds in a financial year must be reported in your ITR. However, you can claim exemption on these under various sections of the Income Tax Act. These exempt incomes are to be reported in the ‘Exempt Income’ schedule of the ITR.
7. Not reporting all bank accounts
From the assessment year 2015-16, a taxpayer is required to report all the bank accounts held by him in previous year in his/her income tax return. Earlier you were only required to mention a single bank account in which you wished to receive credit of the income tax refund if any. However, now only dormant accounts are excluded from requirement of reporting in the ITR.
Chandak here adds, “Further for A.Y. 2017-18 you also need to mention the details of cash deposited in your bank accounts during the demonetisation period of 09/11/16 to 30/12/16 if the aggregate cash deposited in all your accounts exceeds Rs. 2 lakh for that period. Failing to report details of bank account may be considered as furnishing of incorrect particulars and may attract consequent penalties or even prosecution if it is established that certain income has escaped the taxes due to such non-reporting”.
8. Not declaring deemed rent/expected rent
If you own another house apart from a self-occupied house and it is lying vacant, then you should report the expected rent in your gross total income. “This may result in some tax payable as the notional rental gets added to your income and non -reporting may lead to penalties as stated above. But in cases where there is interest payable on the housing loan for the said property it can result in some tax savings. But this benefit of interest set-off of loss from house property has been capped at Rs. 2 lakh starting 1st April 2017”, says Chandak.
9. Failing to revise your income
If you have discovered any error once tax filing has been completed, then you must rectify your mistake. You must file the revised return to rectify your mistake. Current income tax laws allow you two years to file the revised returns. However, from the financial year 2017-18, a taxpayer will get only one year after the end of the relevant financial year.
“It is always recommended that once the error is detected taxpayer rectify the mistake within time, pay the due taxes with interest to avoid any penalty for under reporting or mis-reporting. Also if you have missed claiming any deduction or exemption you can enhance your tax refunds by filing the revised returns”, says Chandak.
Here are some of the mistakes that are often made by the taxpayers.
1. Filing ITR using the wrong form
As per tax laws, an individual is required to report all sources of income and file the income tax return using the correct form applicable to him. If he files his tax return, using a wrong ITR form, then his filed return will be treated as ‘defective’ and he will be asked to file a revised ITR using correct form.
“In this case, the taxpayer will get some time to rectify the mistake. A rectified return (in response to notice u/s 139(9)) must be filed within 15 days from the date of receipt of the intimation under section 139(9). This time limit may be extended by the assessing officer on an application by the assessee. If the defect is not rectified within the time limit, then the assessing officer will treat it as an invalid return. In other word, it is same as not filing a return at all. Moreover, the person may face all the penalties related to not filing of ITR in addition to payment of interest u/s 234A for the delay in filing the tax return” says Chetan Chandak, Head of Tax Research, H&R Block, India.
2. Not reporting interest incomes
One should report all the interest incomes received or accrued due to him in the previous financial year (for which the return is being filed) while filing his tax returns. Individuals generally forget to report interest earned from savings bank account, fixed deposits, recurring deposits, etc. under the head ‘Income from other sources’.
While interest received or accrued on fixed and recurring deposits are fully taxable, one can claim tax relief on interest earned from the savings bank account upto a certain limit. Section 80TTA of the Income Tax Act provides that interest upto Rs 10,000 can be deducted from the total interest earned in a year from bank and post office savings account after arriving at the gross total income. “Further if they have a saving account with any Post office then interest from such account is exempt up to Rs. 3500 (in individual account) and Rs. 7000 (in a joint account) under section 10(15)(i). This is in addition to 80TTA deduction” says Chandak.
3. Not filing income tax returns
Many people don’t file their income tax returns because they have long term capital gains which are tax-exempt and without this their gross total income is below the tax-exempt income level.
However, as per recent amendments in section 139 (1) of the Act, if your exempted long term capital gains along with gross total income exceeds the minimum exemption level, you are required to file your income tax return.
For instance, let us assume that in a financial year your gross total income is Rs 1 lakh and long term exempted capital gains is Rs 2 lakh. Earlier you were not required to file income tax return as your total income was below the minimum exemption limit of Rs 2.5 lakh.
Now due to the recent amendment in tax laws, you are required to file ITR as your gross total income plus long term capital gains (Rs 1 lakh + Rs 2 lakh > Rs. 2.5 lakh) exceeds the minimum exemption limit.
4. Not clubbing incomes
As per the rules of clubbing of Income, a taxpayer is required to add income of specified persons (minor children, spouse, son’s spouse, etc.) to his own income and the tax payable by him is calculated on the total of this these two incomes. This is mostly the case when the income of minor child is added to the income of his/her parent. Section 60 to 64 of the Income Tax Act specifies the provision of clubbing of incomes. “In the case where minor’s income gets clubbed with that of any parent, he/she can claim exemption up to Rs. 1,500 under section 10(32). In case if you miss reporting this income (of minor child) you may have to pay the tax due, along with interest and you may even be subjected to a penalty of 50% for under reporting or 200% for mis-reporting of your income (up to A.Y. 2016-17 this penalty was 100-300% of the taxes avoided)”, says Chandak.
5. Not reporting income from the last job
If you have switched jobs in a financial year then income from your previous job must be reported while filing income tax return along with income from the current job. If any income (from previous job) is not reported, then a discrepancy is bound to reflect in your TDS certificates, Form 16 and Form 26AS. This is bound to bring you taxman to your door. “Again the penalties are same as not clubbing of income”, says Chandak.
6. Not reporting tax free incomes
As a taxpayer, you are duty bound to report all your income even if some is tax free. Interest earned from provident fund or/and tax-free bonds in a financial year must be reported in your ITR. However, you can claim exemption on these under various sections of the Income Tax Act. These exempt incomes are to be reported in the ‘Exempt Income’ schedule of the ITR.
7. Not reporting all bank accounts
From the assessment year 2015-16, a taxpayer is required to report all the bank accounts held by him in previous year in his/her income tax return. Earlier you were only required to mention a single bank account in which you wished to receive credit of the income tax refund if any. However, now only dormant accounts are excluded from requirement of reporting in the ITR.
Chandak here adds, “Further for A.Y. 2017-18 you also need to mention the details of cash deposited in your bank accounts during the demonetisation period of 09/11/16 to 30/12/16 if the aggregate cash deposited in all your accounts exceeds Rs. 2 lakh for that period. Failing to report details of bank account may be considered as furnishing of incorrect particulars and may attract consequent penalties or even prosecution if it is established that certain income has escaped the taxes due to such non-reporting”.
8. Not declaring deemed rent/expected rent
If you own another house apart from a self-occupied house and it is lying vacant, then you should report the expected rent in your gross total income. “This may result in some tax payable as the notional rental gets added to your income and non -reporting may lead to penalties as stated above. But in cases where there is interest payable on the housing loan for the said property it can result in some tax savings. But this benefit of interest set-off of loss from house property has been capped at Rs. 2 lakh starting 1st April 2017”, says Chandak.
9. Failing to revise your income
If you have discovered any error once tax filing has been completed, then you must rectify your mistake. You must file the revised return to rectify your mistake. Current income tax laws allow you two years to file the revised returns. However, from the financial year 2017-18, a taxpayer will get only one year after the end of the relevant financial year.
“It is always recommended that once the error is detected taxpayer rectify the mistake within time, pay the due taxes with interest to avoid any penalty for under reporting or mis-reporting. Also if you have missed claiming any deduction or exemption you can enhance your tax refunds by filing the revised returns”, says Chandak.
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