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When you lose tax exemptions

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You have claimed some exemptions on your income or investments, you could lose the For instance, if a taxpayer does not fulfil the allowing exemption/ deduction, then the exemption already allowed shall be withdrawn. In such cases, it is the taxpayer's duty to report the withdrawal of exemption in says Vineet Agarwal, exemption being reversed, it will not be accepted. Ignorance of law is not a justification for tax evasion." Some of the instances under which these exemptions could be withdrawn are:

 

Selling your house bought on loan within five years of buying it If you take a home loan to buy ahouse, you are entitled to exemption on the re- payment of the principal under Section 80C. You can claim exemption up to ₹ 1 lakh under this head. However, if you sell the house within five years of buying it, you will lose this exemption in the year you sell the house. For that year, the principal amount gets added to your income and you will be taxed according to your income slab.

However, the exemption for interest paid, under Section 24 (b), will not be withdrawn.

Surrendering a life insurance policy within two years Premiums paid towards life insurance policy are also exempt under Section 80C, up to a maximum of ₹ 1 lakh. If you purchase a life insurance policy and realise it does not meet your needs or the premium is more than what you expected, you may decide to discontinue the policy. However, if you surrender the policy within two years, you will lose the exemption on the premium paid.

Withdrawing provident fund amount before five years If the amount contributed to provident fund ( PF) is withdrawn before five years of continuous service ( subject to specified conditions), the exemption / deduction availed at the time of making the contribution shall be withdrawn in the year of PF withdrawal.

Many of us withdraw our PF money while changing jobs. But if it is within five years, then not only will the PF money be taxed upon withdrawal, but the tax exemption received in the previous year will also be withdrawn.

Selling of property, which is exempt from capital gains, within three years of purchase When you sell a property, you can claim exemption from capital gains under Section 54 of the I- T Act by investing in house property. For instance, if you had purchased a property for ₹ 40 lakh and sold it later on for ₹ 1 crore, you can claim exemption for the ₹ 60 lakh profit by investing in another house. However, if you sell the second house within three years, then the exemption claimed earlier will be withdrawn.

The entire amount will be added to your income (in this case ₹ 60 lakh) and you will be taxed accordingly.

Delay in construction of house for which loan is taken If you have taken a home loan to construct a house and the construction is not complete within three years from the end of the year of taking the loan, then the deduction for interest on the house will be restricted to ₹ 30,000.

Cash donation made for an amount above ~ 10,000 Any donation made in cash under Section 80G for a social cause or for any government recognised charity is allowed for exemption only up to ₹ 10,000. If the donation is more than ₹ 10,000, then deduction under Section 80G is not allowed.

For business purposes Businessmen or self- employed persons are allowed deduction for various kinds of expenditure incurred as part of their business. For instance, money paid to a vendor or contractor or salary paid to staff, and so on. In case the tax deducted at source (TDS) is not deducted before making the payment, then the taxpayer is required to pay tax on the entire expense incurred. This rule was introduced from 2005, says Gokhale.

For instance, if you incur an expense of ₹ 1 lakh as part of your business, then you are liable to deduct ₹ 2,000 as TDS, following which you can claim tax exemption on the ₹ 1 lakh. But if you forget to deduct the TDS, then the ₹ 1 lakh is added to your income and taxed according to your tax bracket.

However, if the taxpayer pays the TDS before the due date of filing the returns, then the exemption on the expense will be allowed.

"Though the responsibility of disclosing withdrawal of exemption in the tax return and paying taxes on the same rests with the taxpayer, in case he or she fails to report the same, then the tax authorities may seek information for the past six years under section 148 of the I- T Act," says Agarwal.

If you claim them on certain items of income or investments, adhere to the rules or be prepared to pay a penalty for tax evasion

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