By Vikas Kumar
Income Tax Return Filing: The due date of filing income tax return for the previous year 2016-17 (assessment year 2017-18) is finally here. So while you are busy in collating your investment proofs and other information, you should take care to avoid the most common mistakes people make while filing the return of income. Here we attempt to highlight a few of such mistakes:
Adherence to the filing timelines
In general parlance, people tend to miss the return filing due dates where the entire taxes are either paid as advance tax or are already deducted by the payer of income. In such cases, interest u/s 234A on account of delay in filing the tax return does not get attracted in absence of any unpaid taxes. But there are other benefits which you will lose if you file a belated return. In case of any refund claimed in the return, the interest on such refund shall be computed by the tax department from the actual date of filing the return (belated) and not from the first day of the assessment year (i.e. April 1st). In other words, a one day delay in filing would mean losing interest on refund for at least four months (April, May, June and July). Another loss of benefit is the restriction on carry forward of losses in a belated return (except loss from house property).
Reconciliation of prepaid taxes with Form 26AS
A common mistake people make is not to collect and reconcile all the supporting documents before filing the tax return. Documents like Form 26AS (downloaded from income tax website), Form 16 (salary statement), Form 16A (interest certificate) should be kept handy and quickly reconciled with the computation of income for any mismatch. You can contact the payer of the income (employer, bank etc.) to obtain these documents in case you have not received the same yet. Any mismatch of prepaid taxes claimed in your return with the amount appearing in your Form 26AS may result in receipt of a demand notice from the department.
Non-reporting of exempt income
We generally give importance to computing taxable income and meanwhile forget to pay attention on exempt income disclosure. Since it is equally important to report exempt income in the return form to disclose your annual financial transactions, you should not forget to report dividend from mutual funds/ Indian company (up to Rs 10 lakhs), NRE bank interest, exempt capital gains on sale of shares/units of mutual funds etc. Also, you should keep relevant supporting documents for these exempt incomes to answer questioning (if any) from the tax department at a later stage.
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Determination of type of capital gain
The capital gains are of two types – short term capital gains (STCG) and long term capital gains (LTCG). A careful examination of the type of capital gain is required before applying the applicable tax rates. Many of you must be investing in securities and incurred capital gains during the year on sale of such assets. Considering the different holding period for different securities, people tend to determine the type of capital gain incorrectly. In case of sale of listed shares/ securities, units of equity oriented mutual funds, units of UTI and Zero coupon bonds, capital gain is considered as LTCG if they are held for more than 12 months. For unlisted shares of a company, such 12 months is substituted by 24 months and for unlisted debentures/ debt oriented mutual funds, it is 36 months. Another area of common mistake which NRIs do to claim basic exemption limit of Rs 250,000 from STCG on sale of listed equity shares/ equity oriented mutual fund in India. For non-residents the basic exemption limit of Rs 250,000 does not apply against the STCG earned on sale of such shares/units.
Computation of income from house property
There are rules prescribed for computing income from house property where the individual owns multiple properties or the property is let out for a part of the year. It is common for people to skip the prescribed rules in this regard. In case you are living in your house for a part of the year and for the remaining part property is let out owing to your overseas assignment, you should compute taxable income on the actual rent received (for the period of actual let out) plus notional rent for the period you self-occupied the house (considering deemed let out). Also, where you have multiple properties and more than one house is self-occupied/ vacant for the whole year, only one property can be considered as self-occupied and rest all such properties to be taxed as deemed let out. You should be careful in computing such income and disclose all your properties in the tax return and not just the let out properties.
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Applicability of clubbing provisions
Most of us are aware that there is no joint filing concept in India and hence, you and spouse are required to file return of income independently. We sometimes tend to over-look income which is not earned/ received by us, yet may be clubbed in our hands owing to clubbing provisions. This may apply where income is earned from an asset which is transferred by you to minor child/ spouse/ son’s wife without adequate consideration. Special attention should be paid on the computation of such clubbed income and its disclosure in the tax return to avoid any mistakes in this regard.
Set off of brought forward losses
We generally believe that return of income filed for one year is independent of another and hence, there is no correlation. While saying this, we tend to forget the fact that under the law, set off of brought forward loss from past year against income of current year is allowed. While filing return of income, it is always better to give a glance to the last year filed return to check if any loss is carried forward and eligible to be set-off this year.
Quoting wrong assessment year while paying self-assessment tax
It is not always necessary that tax on the income earned by you is already deducted by the payer. Then you will be required to pay due taxes through self-assessment mode before filing the return of income. It is very common to see people filling incorrect assessment year in the tax challan while depositing self-assessment tax and consequently end up paying taxes for the wrong year. To clarify this, you should remember to fill assessment year 2017-18 while preparing the challan for this year’s tax (i.e. financial year 2016-17). Also, you should check your Form 26AS around 10-15 days after depositing the taxes to confirm if the credit of such taxes appear under your PAN against the correct assessment year.
Selection of incorrect return form
It is seen that people generally select incorrect return form to file their return of income. If you file return using an incorrect form, it will be treated as defective return and you may receive notice from the tax authorities to rectify the same. If you have income from business or profession you can use ITR 3, elsewise, you can use return forms ITR 1 or ITR 2 depending upon the source of income, residential status, etc. You can use ITR 1 if you have income from salary, one house property (excluding loss cases) and income from other sources (excluding loss cases, winning from lottery/ race horses, dividend income from domestic company exceeding Rs 10 lakhs, unexplained cash credit/ investment/ money/ expenditure). However, if your total income exceeds Rs 50 lakh or you are required to disclose your foreign assets/income, you cannot use ITR 1.
Generally people do not give much attention to disclosure requirements in the return form. Either they leave the required fields blank or provide estimated value against the assets, income, liabilities to be disclosed in specified schedules. There are two important disclosure requirements in the return form under the schedules – “AL schedule” (applicable only where total income exceeds Rs 50 lakh) and “FA schedule” (applicable only for ordinarily residents having assets/ accounts, etc. situated in a foreign country). Extra care should be taken while reporting foreign assets/ accounts, etc. as non-reporting or incorrect reporting will attract a penalty of Rs 10 lakh and may also expose you to prosecution provisions under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. While filing return of income this year, you should also remember to report the amount of cash deposited in bank account during the demonetization period (09.11.2016 to 30.12.2016) if the amount deposited is Rs 2 lakh or more in aggregate of all bank accounts.
(The author is Director-Personal Tax, PwC India. Views are personal.)