By Puneet Gupta
In the past few years, the Government of India has taken various transformational reforms to move progressively towards digitization and automation. The main aim of the government has been to focus on transparency and bring in an era of greater tax compliance. With an objective to broaden the tax base, the Income-tax Return (ITR) filing forms have been overhauled and additional reporting requirements have been introduced.
ITR filing is an annual ritual in which the income earned during the year and tax thereon need to be reported. Every person having taxable income exceeding the exemption limit before claiming deductions under Chapter VI-A of the Income-tax Act, 1961 (Act) is required to file the ITR.
Below are some of the key points to be considered while filing ITR:
1. Confusion between Financial Year and Assessment Year
Individuals are usually unclear on the difference between the financial year (FY) and the assessment year (AY). In India, tax is levied on the annual income earned during the FY. The year in which income is earned is called the FY and the year following the FY, in which such income is assessed to tax, is called the AY.
For example, for the income earned during the period 1 Apr 2016 to 31 Mar 2017, 2016-17 will be referred to as the FY and the following year i.e. 2017-18 will be referred to as the AY.
For an individual with salary, house property and other income, the due date to file the ITR for the FY 2016-17 is 31 Jul 2017.
2. Misconceptions and common mistakes
(i) Reporting of Exempt Income
Income such as dividend on listed shares, dividend on mutual funds, long-term capital gains on sale of listed equity shares or units of equity-oriented mutual funds, interest on Public Provident Fund accounts, etc. are exempt from tax.
Individuals generally miss reporting such income in the ITR assuming that since such income is not chargeable to tax, there is no requirement to report the same. However, exempt income is also required to be reported under a specific schedule in the ITR form.
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(ii) Bank accounts and Interest Income
It is a common perception among individuals that it is enough to report only one bank account in the ITR. However, it is mandatory to provide details of all savings and current bank accounts operational anytime during the FY in the ITR.
Incorrect reporting of bank account details such as incorrect bank account number or IFSC code may result in non-delivery of the eligible tax refund. Thus, tax payers should make sure to provide correct bank account details to claim eligible tax refund smoothly.
Individuals may also skip to report the interest earned from the bank accounts assuming it to be tax free or because tax has already been deducted at source.
Interest earned from savings bank account, fixed deposits and recurring deposits is fully taxable. However, Section 80TTA of the Act allows deduction upto Rs 10,000 for the interest income from all savings bank account earned during the year. Thus, even where interest income is less than Rs 10,000, the interest income needs to be reported as taxable income and deduction under Section 80TTA should be claimed in the ITR.
Similarly, interest earned by a non-resident from Non Resident Ordinary (NRO) account is taxable. However, interest from Non-resident External (NRE) account earned by a non-resident is fully exempt from tax.
Also, interest income from fixed deposit, recurring deposit, NRO is subject to TDS provisions and tax is deducted at source at applicable rates.
For example, bank deducted TDS @ 10% on interest income on fixed deposits held by resident individual. However, the interest income is taxable in the hands of individual at applicable slab rate. Thus, the individual may need to pay the balance tax as advance tax or self-assessment tax before filing the ITR.
(iii) Rental income from deemed let out property
Some individuals disclose only the actual rental income from house property but may miss to report the deemed income from their vacant house in case they own more than one house property.
Under the provisions of the Act, in such a case, any one property is treated as self-occupied and its annual value is considered as nil. The other house property is deemed to be let-out and the expected rent is treated as income (gross annual value).
A standard deduction of 30% of the net annual value (gross annual value less municipal tax paid during the year) and a deduction for actual interest paid on the housing loan taken in respect of that property can be claimed.
For example, an individual has 3 house properties out of which only one is let out. In such case, the individual will need to offer actual rent on the let out property (assuming the same is not less than the market rent) and market rent on any one of other two properties to tax. The individual will be allowed deduction for 30% of the annual value of both houses and for interest paid on housing loan if any.
A point to note here is that under-construction property is not considered as a house property for tax purposes.
3. Verification with Annual tax statement (Form 26AS)
Form 26AS is a good starting point for ITR preparation. Form 26AS shows the various heads of income on which tax is deducted at source by the payer of income – it has record of both the income and the tax deducted at source on such income.
This document must be checked before filing the ITR to cross verify the tax deducted details. It also contains the details of any advance tax or self-assessment tax paid or any income tax refund received from the tax department during the relevant FY.
Additionally, Form 26AS reflects the details mentioned in the Statement of Financial Transaction (SFT) – earlier called as Annual Information Return (AIR). SFT is filed by different entities stating the details of specific transactions such as high value investments, credit card expenses, cash deposits and purchase or sale of immovable property, etc.
Any mismatch between the ITR and Form 26AS may lead to further inquiry from Income-Tax Department. Therefore, it is necessary to check the details from Form 26AS before filing the ITR.
Further, it is important to make a few last-minute checks before filing the ITR, such as – correspondence address, phone number and email ID so that the department can send updates relating to tax demand, refund, etc.
(The author is senior tax professional, EY India. Views expressed are personal.)