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Nobody will raise an eyebrow if you give incorrect information to a tax adviser. Many readers who write in for tax advice to ET Wealth don’t mention interest income in the form. But all hell could break loose if you make the same mistake in your income tax return (ITR). Interest income from bank deposits, bonds, and most post office schemes is fully taxable. It has to be declared in the “Income From Other Sources” section in the ITR.
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However, tax filing portal Taxspanner found that almost 80% of taxpayers who filed their returns do not report any interest income. “Not declaring this income amounts to tax evasion and could fetch a notice from the tax department,” says Sudhir Kaushik, Co-founder and CFO, Taxspanner.com.
Things become more serious if the undeclared income is substantial and tax has not been paid on it. The taxpayer could be slapped with a late payment penalty. Many taxpayers are under the misconception that if TDS has been deducted on their fixed deposits, they don’t have to pay more tax. “TDS is not the end of your tax liability,” says Kaushik. It is only 10% of the interest income. If the taxpayer falls in a higher tax slab, he must pay additional tax.
Savings bank interest
While interest from bank deposits is fully taxable and savings bank interest partially taxable, even tax-free incomes have to be declared. “Amounts credited to your bank account on maturity of the PPF or as interest on tax-free bonds must be duly reported in the return,” says Archit Gupta, Founder and CEO, Cleartax.in. In ITR-1, there is a separate section for disclosing exempt income. In other forms, this must be reported under Schedule EI (Exempt Income).
Similarly, while dividends up to Rs 10 lakh are tax free under Section 10(34) and income from a life insurance policy is tax free under Section 10(10d), these incomes must be reported in the tax form. While most taxpayers ignore small sums of exempt income, experts say large amounts should be declared. “Disclosing this income in the return helps create a trail and gives the taxpayer ready explanation for investment or use of such money in future,” says Gupta
This assumes greater importance because when you make high-value investments or purchases, the transaction is reported to the tax authorities. If you buy a car worth Rs 8-10 lakh or book a flat with a Rs 10-15 lakh downpayment or even invest a large amount in stocks or mutual funds, the car dealer, real estate developer and stocks broker is supposed to inform the tax department. You will find it easier to explain the source of funds if you declare them in the tax form. Taxpayers are also required to mention tax-free capital gains. “Tax filing is mandatory for those who do not have taxable income but have exempt LTCG of Rs 2.5 lakh or more,” says Gupta.
Incomes that need to be reported
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Scrutiny by tax department
Ignore this advice at your own peril. The tax department is putting all deductions and exemptions under the scanner. “The finance minister has stated that salaried taxpayers who claim fake exemptions and deduction, especially HRA, would be caught,” warns Kaushik. Salaried employees who claim an exemption for HRA have to furnish the PAN of the landlord if the exemption exceeds Rs 1 lakh. If above Rs 50,000 a month, they also have to deduct TDS on the rent.
Gupta says tax forms now ask for a detailed breakup of salary, including allowances which are exempt under Section 10. “Specific fields have been provided for all other types of exempt income, including capital gains,” he says.
(As published in ET Wealth, on April 30, 2018)
