Interest income is where many taxpayers are going wrong. Almost 30% of the respondents believed that interest of up to 10,000 from bank fixed deposits (FDs) is tax-free in a year. They should know that the exemption under Section 80TTA is only for the interest on their savings bank accounts. What they earn on fixed deposits and recurring deposits (FDs) is fully taxable. Similarly, almost 30% believe that the interest earned on tax-saving infrastructure bonds bought a few years ago under Section 80CCF is not taxable because they were tax-saving instruments. Wrong again. The bonds may have helped them save tax, but the interest is fully taxable and has to be reported. Nearly 45% of the 637 respondents who said so earn over 12 lakh a year and should be paying 30% on the income they think is tax-free. This is a common misconception. Our research shows that nine out of 10 taxpayers go wrong in reporting their interest income.
There is also a misconception that there is no need to report income on tax that has been deducted at source (TDS). But TDS is only 10% and if your income puts you in the 20% or 30% tax bracket, you have to pay additional tax. Of course, if the income is below the basic exemption limit, TDS will be refunded after the return is filed.
The other critical error is reporting income from a second house. Almost one out of five respondents believe there is no tax payable if a second house is lying vacant. Even if you haven't rented it out, you have to pay tax on the notional income based on the prevailing market rate in that location. From this year, the tax forms have a separate column for declaration of property and owners will not be able to avoid re porting them to the authorities. This rule about the tax on notional rent was always there. It is only that this year's tax forms have made it clear by providing a separate column for such property.
Taxpayers are also not clear about clubbing of income. More than 31% of the respondents believed there is no tax implication if they invest in a recurring deposit in their wife's name or open a fixed deposit in the name of a minor child. The income from such investments is treated as the income of the giver and taxed accordingly . Of the 668 respondents who got this wrong, more than 30% are in the highest tax bracket.
A significant 45% of respondents weren't clear about the mode of filing returns. Online filing is compulsory if income is above 5 lakh a year, you have foreign assets or are claiming a refund. Even if a physical return is accepted in the last-minute rush, it will ultimately be treated as an invalid return at the time of assessment. To be sure, not reporting a small amount of interest income or claiming a deduction incorrectly rank very low in the hierarchy of tax offences. At most, you will get a notice with an additional tax demand. There may even be a penalty under Section 271 (c) for concealment, but it depends on how the assessing officer views the transgression.
If the assessing officer is convinced that it was a genuine mistake and the taxpayer's intent was not to evade tax, he might not levy a penalty.
On the other hand, taxpayers need to extra careful about foreign assets. Uncovering black money is high on the government's agenda, and any slipup on reporting of foreign assets immediately puts you in the dock.
The logic used by the tax department is that anyone with foreign assets has high income and should not be spared if he has concealed income. To be sure, almost 89% of the respondents got this right. But that still leaves around 11% of taxpayers who might falter when it comes to declaring their foreign assets.
The department is keeping a close eye on accounts and assets held outside India. The new ITR-2 (income tax return form) requires you to give details of your foreign bank account's holding status (both as an owner and as a beneficiary), account opening date, interest accrued during the year and schedule and fields number under which the same income is reported.
Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015
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