Some Common Tax Filing Mistakes

Many of us have been working for years now and file our tax returns diligently every year. But, the truth is, even the most cautious & meticulous individual is prone to making silly mistakes while filing his/her income tax or while declaring details to their employer. This post is about some of those silly mistakes, which might seem too-little-to-worry kind of mistake but, if big brother decides to investigate, they can impose heavy penalties and punishments. So, it is extremely important that we file our tax returns truthfully and most importantly without missing any details.

Before we begin – The Tax Calculation Process:

In almost 90% or more cases, the tax payer works for a company that pays a salary and issues a form-16 to the individual. The tax payment process works as follows:

1. Employer debits a small amount of salary every month as TDS (Tax Deducted @ Source)
2. Employer collects Investment & Expenditure proof for areas like Sec 80C, HRA, Medical Expenses etc
3. Employer processes all documents received from employees and calculates the Tax Liability and deducts the TDS accordingly so that the employee’s net tax to be paid to the Government is as close as possible to “0”
4. At the end of the financial year, employer issues the Form-16 to the Employee
5. Employee uses this Form-16 to file his/her tax returns
The process is simple, isn’t it? The important catch here is point no. 2. That is why I have intentionally typed it in both Bold and Italics…

What are those mistakes?

The most common mistakes that we do as tax payers when it comes to Income Tax Calculations are:

1. Not declaring Interest Earned from Bank Accounts, Fixed Deposits etc
2. Double Declaration of Expenses like HRA, Medical Bills, etc
3. Not declaring other sources of income like Gifts
4. Double Calculation of Standard Deduction

Lets take a look at them one by one

1. Not declaring Interest Earned from Bank Accounts, Fixed Deposits etc

This is probably the simplest and most common mistake we do every year. Yes, you read me right. You need to include the Interest earned from your Savings Account, Fixed Deposits, Recurring Deposits etc as “Income from Other Sources”. You may ask me, Come On Anand, the interest I earn on my savings account is probably less than One Thousand rupees in a year. Should I still declare it as an income? Unfortunately, Yes. Irrespective of the amount involved, even if it is only One Hundred Rupees, you need to declare that as an income and pay the income tax due on it, even if it is just One Rupee.

TO-DO: Collect an Interest Earned statement from your Bank on all your accounts that might earn an interest (like Savings Account, Fixed Deposit, Recurring Deposit etc) and declare the amount as “Income Earned”

2. Double Declaration of Expenses like HRA, Medical Bills, etc

These days, both spouses working and that too in two different company’s is very common. Most company’s only ask for Xerox copies of documents like Medical Expenses, House Rent Proof, Investment Proof like Insurance Premium Receipt, Childrens Education fees etc. So, in such cases, some couples submit a copy each in their respective company’s. in all such cases, company’s take these documents as true declarations from their employees and calculate the tax liability according to it. In reality, for a single expenditure two people are claiming tax rebates. Which is obviously wrong.

If you are someone who asks, “Anand, I did not know about such a rule. If I did it by mistake, will I still be in trouble?”

Yes, you will be in trouble. Unfortunately for us the saying “Ignorance is Bliss” doesn’t hold true when it comes to our IT Department. You are liable for all mistakes irrespective of whether you did it intentionally or inadvertently.

If you are one of those smart guys that asks “We work in two different company’s. is there any way that our company or even the IT Department find this?”

In all probabilities they wont. But, if you are one of those unlucky guys (If you are someone like me, who always ends up on the unlucky end of everything) would you want to take that chance?

TO-DO: Declare each investment/expenditure only once. If both the husband and wife are sharing the expenditure, make sure that you share the declarations as well. For ex: If you have two insurance policies, each one declares one of the premiums. Or, if you have two kids, each person declares the school fees paid on one kid.

3. Not declaring other sources of income like Gifts

Today is Feb 13th and tomorrow is Valentines Day. If you are one of those loving lovers/prospective husbands etc etc who gift your fiancé/lover a costly gift, you may be causing some real trouble for your would-be wife.

Whoa!!! Did I just say that?

Yes, Of Course I did. As per the Indian IT Laws, any gift that is worth more than Rs. 50000/- in value has to be considered an income and will be clubbed along with your income.

So, if you got your fiancé a diamond engagement ring worth more than Rs. 50,000/- then your prospective bride to be has to pay taxes on the value of the gift.

Did I just dampen your Valentine Day Spirit? If so, Please Forgive Me. I would suggest you get a gift that isn’t worth more than Rs. 50,000/- and wait until your wedding to get those costly luxurious gifts to your wife. The fact here is that, the money you spend on the gift is your hard earned money, for which you have already paid Income Tax. So, there is practically no point in paying tax on something for which you already paid your taxes. Nonetheless, a rule is a rule.

However, this rule doesn’t apply under the following scenarios:
a. If the gift was received during a Marriage
b. If the gift is being given/taken from a family member which includes all direct blood relatives like siblings, spouse, parents, spouse’s siblings, spouse’s parents, children of any of these people.

TO-DO: Include details of all Gifts received from non-family members as income from other sources.

4. Double Calculation of Standard Deduction

This is a very rare scenario but one that can do a lot of damage. Let me explain. In 2007 August, I resigned from one company and joined another. Since, I had earned salary income from two employers during a single financial year, I had two form-16’s. Doesn’t sound complicated, or does it?

Unfortunately, both my employers had calculated a “Standard Deduction” of 1.5 lakhs (At that time) while calculating my tax liability. But, when I combined both my form-16’s, I had to shell out a large sum of money from my pocket to pay-off the remaining taxes. The problem here was, both my employers had calculated my TDS and deducted it after considering the standard deduction. The mistake on my part here was that, I did not declare my income from the previous employer to my new employer. As a result, I ended up paying a lumpsum from my pocket instead of it being deducted from my salary as small amounts.

TO-DO: If you switch jobs, make sure you submit details of previous income to your current employer so that, they don’t miss it.

Rationale: The Extra Income Tax you will end up paying, if you are careful in ensuring accuracy in the above mentioned points will be a few hundred or in some cases, a few thousand rupees. If you think about the trouble we will be in if authorities scrutinize our tax papers, this few thousand rupees isn’t even worth 1% of the trouble…

Happy Tax Filing!!!

Bad News for Salaried Employees of India

Well, I am among the millions of Indians who are unhappy because of this news but nonetheless, we dont have a choice and the only thing we can do is, try to mould the situation in a way that we get the most out of it.

What is this about?

Remember the post a few weeks back that was titled Good News for Salaried Employees of India??

I had explained that the Income Tax department of India has made some changes to the Tax Return Filing policy which will be a good news for all of us. Unfortunately, I have to Apologize for talking too soon about it.

After a few weeks, we are starting to get more clarity on this development and now it looks like this Good News isnt so good after all...

What is the Problem here?

The Central Board of Direct Taxes (CBDT) had made millions of Indians smile by announcing that salaried taxpayers with an annual income of up to Rs 5 lakh need not file their returns. (Refer to my article mentioned in the previous paragraph) They won't have to spend time, effort and money in filing their tax returns.

The problem here is that, given all the conditions that govern if someone needs to file his/her returns or not, it looks unlikely that it would be of any real use to us. At the end of the day, if the conditions are going to ensure that everybody does file their returns like usual, whats the point of having this new ruling?

According to the Ruling by the CBDT, a salaried person is exempt from filing his return for the financial year 2010-11 if he fulfils the following conditions:

a) Income after allowable deductions is up to Rs 5 lakh.
b) Income is only from salary and savings bank interest
c) Salary is from one employer.
d) Savings bank interest is below 10,000.
e) Tax on bank interest is paid and included in Form 16

Let us analyze these points one by one.

a. Income after allowable deductions is up to Rs 5 lakh.

Fine - Fair Enough. Many of us will fall under this bucket.

b. Income is only from salary and savings bank interest

Problem - Anyone who is earning around 5 lakhs a year may have Bank Fixed Deposits, Share Market Investments, Mutual Fund Dividends, Rental Income etc. So, anyone who earns an income out of any of the two means (Salary & Savings Bank Interest) cant use this.

Even Investments made under section 80C like NSC, PPF or infrastructure bonds to claim deduction under Sec 80CCF are not considered. So, if you have done something to save tax in the past and earned an income out of it, you cannot use this.

Result - Atleast 65% of people are now out of the bucket.

c. Salary is from one employer only.

Problem - Anyone who switched jobs cant take advantage of this rule. Even if your income is below 5 lakhs, if you switched jobs, you cant use this.

Result - Another 10 - 15% of us are out of the bucket.

d. Savings bank interest is below 10,000.

Problem - Lets assume that I dont invest in any investment option like stocks or mutual funds or bank FDs and keep all my cash in my savings account. At the end of the year, I may earn an interest of more than Rs. 10,000/- and it is a very real possibility. Unless you are someone who spends every single rupee you earn, you cant use this.

Result - Another 10 - 15% of us are out of the bucket.

e. Tax on bank interest is paid and included in Form 16

Problem - Your employer will give a form 16 only for the salary he pays you. Why would he bother about clubbing your bank interest earned? Some employers ask for other income earned before they print out the form 16s for you. If you are that lucky bunch, you may get an interest paid certificate from your bank and give it to your company. Otherwise, you cant use this.

Result - Another 10 - 15% of us are out of the bucket.

Let us do the Math:

Out because of condition b - atleast 65%
Out because of condition c - atleast 10%
Out because of condition d - atleast 10%
Out because of condition e - atleast 10%

Summing Up - 95%

So, this essentially means that 95% of the salaried population that may fall under the 5 lakhs slab will not be able to use this new ruling and will eventually have to file their tax returns.

A point to note here is that - even this 5% seems to be a big number. Am not really sure if someone would fall under all these categories and still manage to not file their tax returns. The more realistic number would be around 1% of the population or even less.

Let's assume that there is indeed somebody (A hypothetical Situtation) who has no such investments and, therefore, no income other than from his salary and the interest on the bank account. Even then, he may not be able to fulfil the conditions for exemption. The notification says that the tax due on the interest income should have been paid and the income and the tax should be mentioned in Form 16 from the employer. The interest on bank account is credited on a half-yearly basis. The interest from October to March gets credited after March 31. You need to be a financial expert to correctly estimate the tax due on this income and pay the right amount. Considering the fact that banks pay interest on your daily end-of-day bank balance, the calculation part for even 3 months is going to be hectic and you can easily rule out the 6 months part. Without a tool that calculates your interest based on daily balances (and this is if you know your daily end of day balance) you cant really predict your bank interest income.

What is the final Verdict?

Given all the complicated conditions and the paperwork required to avail of the exemption and the possible repercussions of not filing your return, it looks like spending the 30-40 minutes online to file your tax returns is a far simpler option.

It will save you a lot and I mean a lot of time and effort and it is extremely easier than breaking your head about all these conditions...

Happy Filing your Tax Returns.

Good News for Salaried Employees of India

Yes, you read the title right. There is indeed some good news for Salaried Employees of India. The government has recently released a notice that is good news for the salaried class of India. Read on to learn more!!!

Before We Begin:

I have written many articles on Indian Income Tax. You can read them to familiarize yourself with the Indian Tax Laws by reading them. To read them “click here”

What is the Good News?

Well, the good news is the fact that

“No Income Tax Returns is required for Salaried Individuals whose annual taxable income is upto 5 lakhs”

How is this Good?

Below are some reasons why this is good:

1. People who have annual income of upto Rs. 5 lakhs need not file any tax returns
2. Companies don’t have to deduct TDS (Tax Deducted at Source) for their employees whose annual incomes are less than 5 lakhs
3. Employees will get their full salary without any tax deductions (If their annual income is less than 5 lakhs)
4. The government does not have to process tax returns for people whose salaries are less than 5 lakhs and they can concentrate on the higher income group

How many people will be affected/benefited by this?

Approximately 85 lakh salaried individuals in India are expected to gain benefits because of this ruling. Note that, this number is just an approximation and the actual number might be higher or lower than this 85 lakhs.

From when is this effective?

This ruling is effective from financial year 2011-2012. i.e., for this financial year starting April 2011 and ending March 2012, people whose salaries are less than 5 lakhs need not file their tax returns in June 2012.

Points to Note:

Though this is good news, there are some things that we need to keep in mind:

1. The annual income comprises of the individuals salary and any other income that he/she may earn through bank interest, dividend income from Mutual Funds, Capital Gains from Shares etc
2. If your annual income including all the above mentioned entities is more than 5 lakhs, you need to file tax returns even if your salary is less than 5 lakhs.
3. Filing your tax returns is always a good idea if you are thinking of buying a home. Banks often ask for the past 2-3 years of IT Returns when you apply for a home loan and hence, it’s a good idea to file your returns to show that you are a responsible citizen as well as to cement the fact that you are earning legal income and can afford to repay the home loan EMI

Caution:

There is still not much clarity about this 5 lakh limit. Does this cover only people whose annual income is less than 5 lakhs or does this cover people whose annual taxable salary is less than 5 lakhs.

Lets say an individuals annual salary is 7.5 lakhs. He gets a 1 lakh exemption under Section 80C (Investments) and another Rs. 1.5 lakh exemption on his home loan interest and another Rs. 15000 on Medical expenses. If we deduct all these exemptions (amounting to 2.65 lakhs), this individuals net taxable income is only Rs. 4.85 lakhs.

So, in this case, should this person file his returns or not?

Well, unfortunately, there is not much clarity on this front. Experts feel that, this ruling is applicable for these individuals as well, but it isn’t confirmed yet. If there is any clarity on this topic, as you might already know, we will cover that in my blog as always!!!


That’s it for now. Happy Tax Filing!!!

Thoughts to Ponder Before Filing your Income Tax Returns

It is that time of the year when everyone is scrambling around to save tax. Oh yes. Its February and by March 31st the financial year is over and everyone is running around trying to figure out options to save their income tax. And it wouldn't be appropriate if I don't write something for my friends who are in the same mood. This article is going to be about things you need think of and consider before making investments to save your income tax.

So, lets get started!!!

What is Income Tax?

Before we get any further, it would be most appropriate to refresh to everyone what Income Tax is. Income Tax is the money every individual owes to the Government in the country where they work and earn an income. So, everyone who works in India and earns an income has to pay income tax to the Government of India. Now, with that being said you are probably saying “I know that already Pal, get down to business will you?”

Oh yes, I will. Just one more thing. The government of India has certain rules on the tax income slabs and the ways that an individual can reduce his income tax liability. All that info that bores you to death can be found below:

Income Tax in India

Changes in Indian Tax Laws for the financial year 2010-2011

Is Saving Tax Good?

Of course yes. I have said it a zillion times and I wouldn't mind saying it again. “Saving Income Tax is Good” for the following reasons:

1. You pay a lesser amount to the government as Income Tax
2. You get to save some money for your future.

We need to Change our Mindset

Yes, you read it right. We need to change our mindset. Everyone looks at investment as an opportunity just to save tax. On the contrary, investment is something you do to save some money for your future and the tax benefit is just an added bonus. The motivation to invest should be to safeguard our financial future and not saving income tax. I normally find that we tend to think about tax first and investments later. As long as something saves tax, we overlook its characteristics as an investment. Most of the time, deciding on investments at the last minute means that they are chosen more for convenience/availability than suitability.

Why should we consider the Characteristics of an Investment?

Because “IT IS OUR HARD EARNED MONEY”. Investing in something that you are not really sure of can effectively mean that “You are flushing your hard earned money down the toilet”
That might sound a bit exaggerating, but the fact is, bad investments can hurt our wallet pretty bad. Just because you save Rs. 30000/- you cannot go and invest in some junk investment option that is gonna rip you off the whole 1 lakh you invested in it. What good would that make? Get the Point?

Given the mandatory lock-in period in all tax-saving investments, it makes sense for investors to carefully consider this factor before blindly investing/locking their money in them.

There are numerous options that are available to save tax. You may want to look at this article for more details about how to save tax using investments by “clicking here”

Questions to Ask Yourself before making an Investment Decision to Save Tax:

Since taxes are paid on a yearly basis, tax planning becomes an important activity in the process of saving the amount that a person is entitled to legally (Of course, legally. I wouldn't suggest anything that is illegal, would I?).

However, we need to be careful to consider the following before investing. Lets look at them one by one.

1. What are my Requirements? – Short or Long Term?

This is an extremely important consideration. The aspect of the investment to be considered here is the “lock-in” period. Options like ELSS Mutual Funds have a lock-in period of only 3 years whereas options like PPF have a lock-in of 7 years. So, you need to plan about when you will need the money back before deciding on the investment option.

2. What is my risk taking ability?

This again is a very very important consideration. The returns you earn on your investment will be directly proportional to the risk you are willing to take but at the same time, risky instruments have a potential for loss too. There is no guarantee for capital in investments like ELSS because the money is invested in the stock market. Whereas, investments like NSC or PPF are fully 100% capital guaranteed. So decide on your risk taking ability and choose the investment options appropriately.

3. How much do you know about the product?

It is mandatory to check out the credentials of the investment instrument before putting our hard earned money into it. Don't go by hearsay. Do your own research or consult with your friends who are good in the finance and economics to get their opinion before finalizing an investment.

To add on “Don't believe everything your insurance agent or investment advisor from the bank. Hear everything, do your homework and then finalize the investment”

4. How would I like to invest? – One time or Periodic Intervals?

This is not a very important consideration but nonetheless a useful one. Usually stock market instruments are known to be comparatively safer if invested in regular intervals for ex: through SIP. So if you intend on investing in ELSS schemes a SIP would be a better option than a one time bulk investment.

To wrap up, we have thousands of investment options to save tax. If we plan our tax saving activity efficiently we will not only save tax but also save up a lot of money for our future.


Happy Tax Saving!!!