Wednesday, February 15, 2012

Are you an Innocent Tax Evader?

The Title is kind of confusing, isnt it? This article is kind of a continuation to the previous post "Some Common Tax Filing Mistakes". I have added the word Innocent because, a majority of us are law abiding citizens, who earn a salaried income (all-white) and pay the due taxes against our income. However, we may be evading taxes unknowingly. The law does not discriminate against wanted/intentional tax evasion and unintentional tax evasion. Anyone who doesnt pay all the taxes due from them, is a Tax Evader. I wouldn't want to be one. Do you? If you don't want to get into trouble with our IT Officials, then you must definitely read this post carefully.

Lets get down to business, Shall We?

"Tax Evasion" is a hotly debated topic. Especially, after the head of CBI declared yesterday that over 500 billion USD worth of black money is stashed abroad in tax havens by our people. So, What Exactly is Tax Evasion?

To keep it simple: Any action, by which an individual avoids paying of all his tax dues to the Government, is considered Tax Evasion. For ex: If you visit your nearest grocery store and buy some stuff worth Rs. 100/-. The shopkeeper doesn't give you a bill, and you don't bother much about it either. Now, there is no proof that he actually sold you something as per his bills & records. This is an income which he is not going to declare and hence it will be considered "Black" and he is "Evading Tax".

Before we go any further, the purpose of this post is to raise awareness among the innocent population that does not know that, they have to pay taxes on certain situations and hence miss paying their taxes. This post is not for people who intentionally Evade Taxes. You can go back to the previous post "Some Common Tax Filing Mistakes" to learn more about the common mistakes people do with their Income Tax calculations.

Below are some common "I Did not Know" kind of Tax Mistakes:

1. Not Including Interest Earned on Investments done in the name of Spouse or Children

Any money received from a spouse or Parents is "Tax-Free" and you need not pay any taxes on it. However, if you invest that money, the income from that investment has to be added to the income of the giver and taxed accordingly. So, if you made any fixed deposits or recurring deposits in the name of your wife or kids and earned an income on it, you need to declare that income as part of your IT Returns. Note that, this is applicable only if your spouse or kids are not working/earning and you were the source of the funds that were invested by them.

So, if I make a Fixed Deposit in my wife's name, the interest we earn on it will be clubbed to my income (if my wife is a home-maker).

2. Pre-Mature Termination of Life Insurance Policies

In one of my previous posts titled Do Insurance Policies Really Help Save Tax? I had explained about the terms & conditions that are related to tax exemptions against insurance premiums. As explained in that post, there is a mandatory holding period of 2 years for all Insurance policies, if you wish to claim tax benefits on the premium amounts paid. So, if my policy is terminated intentionally by submitting a request to the insurance company or for not paying the premiums properly, I have to revise my tax returns and pay the Government the balance taxes. This amount will be equal to the tax benefit you enjoyed during the year you declared the premium under Section 80C.

You may be wondering, it is my life insurance policy, I can terminate it anytime I want. Unfortunately, if you had not used that premium to avail tax benefits, then you are free to terminate as many policies as you want and at any time you wish. But, once you submit the premium receipts for tax exemption under Sec 80C, you need to hold on to the policy for the minimum/mandatory holding period.

3. Selling a house bought on loan within five years

If you thought that the governments ruling on termination of Insurance Policies was bad, this next paragraph is going to make you feel worse. If a house is sold within 5 years from the date of purchase, all the tax benefits availed under Section 80C over the past years, are no longer valid. This essentially means that you have to re-calculate your tax returns for the past years where you claimed tax rebate on your home loan repayment and re-file your tax returns along with the arrear amounts. This amount will equal to the tax benefit you enjoyed over the past years (Up to a max of 5 years) summed together.

An Important point pertaining to the Insurance Policy Termination & Sale of House within 5 years is that "It is the Individuals Responsibility to pay the tax arrears". The IT Department will not scrutinize each and every individual or their policies or their home loans. However, if for some reason, your records are scrutinized and it is found out that you had not paid your arrears, the IT Department has the right to impose heavy fines & penalties on you. So, it is better to pay the small amount of tax arrears and stay safe, rather than risk paying the hefty fines and face legal charges.

4. Wealth Tax

Wealth Tax is something, not many of us know or pay. As per the Indian Wealth Tax Law, the following items are considered Wealth:
1. Second House (Not the one in which you live)
2. Gold (Jewellery, Ornaments, Bullion etc)
3. Art (Paintings, Statues etc)
4. Luxury Cars/Watches

If the total sum of the above mentioned 4 items is greater than INR 30 Lakhs, you must pay wealth tax. The amount would be 1% of the amount that exceeds the 30 Lakh limit. So, if your wealth is worth 40 lakhs, you have to pay Rs. 10,000/- as wealth tax for this year (1% of 10 lakhs that is above the 30 Lakh limit)

An important mistake people do is that, the current market price of gold has gone up through the roof over the past years. So, if you are someone who inheriting family gold from your ancestors, I strongly suggest you weigh and value it and pay the wealth taxes due against them.

5. Gift Tax

Gift Tax, like Wealth Tax is something, not many of us know or pay. As per the Indian Gift Tax Law, any gifts that were received from un-related persons whose total value is more than Rs. 50,000/- in a single financial year is taxable. Not all gifts are in cash. So, in such cases, a fair value is assigned to each gift and a total is calculated. If the total sum is greater than Rs. 50,000/- for the financial year, the excess amount will be added to your income for that year and taxed accordingly.

Note however that gifts received from Parents, Children, Siblings, Spouse, Siblings of the Spouse and Parents of the Spouse are not Taxable. Anyone who doesn't fall under any of these category is considered an unrelated person and that gift has to be considered for tax purposes.

Anoter strange addition to the Gift Tax rulee is that "When a real-estate (property) is bought for an amount that is less than the stamp duty value, the difference is taxable". If the difference between the sale price and stamp duty exceeds Rs. 50,000/- the excess amount is considered as a gift to the buyer and the buyer has to pay the tax on it.

If you are someone who asks "I use a Tax Consultant/Auditor to plan and file my Taxes. Will I still be in Trouble if I unintentionally miss on any of these items?"

Yes. As per the IT Laws, the Auditor or the Consultant is not held responsible if the Tax Payer (You and Me) has missed declaring any income or missed paying any taxes. It is the Individuals responsibility to ensure accuracy and correctness of all information submitted to the IT Department.

So, it is high time you forgot the "Sorry, I did not know that" tag-line and start knowing our Tax Liabilities and Rules!!!


  1. OMG on point 3. Point 4-1: does this apply even if I'm paying EMI for both or even if I haven't occupied either of these?

    1. Yes Rajesh. However, the wealth tax liability is only on the amount over the 30 lakh limit for the second house. You can consider one of the houses as the one you are living in and take into account the second house for wealth tax calculations. So, if the 2nd house is worth more than 30 lakhs, you need to pay tax on the amount that is over the limit.

  2. Hi Anand,

    If I(am in the 20% tax slab) give money to my wife who is earning salary(is in the 10% tax slab), and she invests the money that I gave her in a FD, who should be paying taxes on the interest amount earned? My wife should be paying the tax on the interest income earned or should it be me?

    1. The person on whose name the FD is placed and is earning the interest has to add the interest to their income. If wife is unemployed, then husband pays tax on that interest.

  3. Hi Anand,

    Thank you for the quick reply.

  4. Hi Anand,

    I am paying around 40000 to my divorced wife for maintenance/alimony. Does She need to pay tax on that? Can I get any tax benefit for the same?


    1. Yes, this 40000 will be considered income on your wifes side and she would have to pay taxes on the same however you will not get any tax benefits for this alimony payment.


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