Someone has rightly said that there are only two things certain in life – death and taxes. So, while no one can avoid tax– if one has taxable income — it is also in your own interest to ensure that you are not paying more income tax than what you are required to pay under the I-T law. Sadly, in lots of cases, this does not happen and taxpayers end up paying more tax to the government – sometimes because of their ignorance of tax laws, and sometimes because of their laziness or inability to claim all the deductions. However, diligent planning and awareness of tax provisions can go a long way in enabling individual taxpayers to optimize on tax costs. Some challenges that may be faced are highlighted below:
1. Identify and capture incomes correctly
First of all, taxpayers need to identify and capture their incomes correctly. Reviewing one’s bank statements, analyzing credits into bank accounts, identifying the taxable income and reporting exempt income help in minimizing unexpected tax and interest demands from the tax authority. As part of checks and balances, the taxpayer should download Form 26AS from the tax department’s website, which clearly reflects the tax withholdings and the related incomes against his PAN. Any mismatch in income as reflected in Form 26AS and the tax return will lead to a query from the tax authorities. It is also important to track any income arising out of financial investments made by the tax payer. With increased data mining, tax authorities are able to track unreported incomes and may trigger automated notices to tax payers.
2. Compute income correctly
Tax laws undergo changes year-on-year and it is important for taxpayers to be updated on these. For instance, salaried individuals need to be aware that they are entitled to a standard deduction of Rs 40,000 per annum with effect from the financial year 2018-19. The exemption of Rs 15,000 p.a. available for medical reimbursements provided by the employer and the conveyance allowance of Rs 1,600 per month are no longer available. The house property loss that can be set off against any other income is limited to Rs 200,000 per annum, effective financial year 2017-18. The balance of any house property loss needs to be carried forward for 8 years and set off against any future house property income.
Similarly, taxpayers with capital gains need to be aware of the tax implications relating to long term and short-term assets and the opportunities available for optimizing taxes by investing in specified assets. While long-term capital gains relating to listed equity shares were tax-free in the past, such gains in excess of Rs 1 lakh are taxable with effect from financial year 2018-19.
3. Timely declarations to employer
Employers are authorized to consider various exemptions and deductions in arriving at the taxable salary, but these are available only if the employee submits suitable documents to the employer in a timely manner. Non-declaration or non-submission of related proofs in a timely manner will result in higher tax withholding by the employer and a need to claim refunds in the tax return. On the other hand, incorrect declaration or missing critical elements while submitting proofs may also result in higher tax outflow. For example, not furnishing landlord’s PAN would result in higher tax outflow if the rent paid by employee exceeds Rs 1 lakh in a financial year.
4. Unawareness of available tax deductions
It is important to identify the tax reliefs available and make sure the same is claimed in the tax return. While the deduction available up to Rs 1.5 lakh under Section 80C is well known, other reliefs of Rs 5,000 for preventive health checkup, deduction of interest on education loan, additional deduction of Rs 50,000 for investment in NPS etc. need to be kept in mind. An individual taxpayer not in employment may also claim deduction for rent where specified conditions are met.
5. Timely payment of advance taxes, filing of tax return
Individual taxpayers (not being senior citizen) have a liability to pay advance tax in quarterly instalments if adequate taxes have not been withheld and taxes due exceed Rs 10,000. Default in this regard would trigger interest. Non-filing of income tax return within the due date would trigger an additional fee ranging from Rs 1,000 to Rs 10,000.
Evidently, an extra effort by taxpayers may lead to efficient tax planning and undue tax outflow can be avoided.
(By Saraswathi Kasturirangan, Partner, Deloitte India, and Vijay Bharech, Manager, Deloitte Haskins and Sells LLP)