If we legally plan our taxes, a lot of money can be saved, and money saved is money earned! Also, it is important to understand the possible reasons for getting an Income Tax (IT) scrutiny.
Understanding important documents
- Form 16 (from employer)/ Form 16A (from bank and other sources) give details of the tax deducted at source (TDS), and deposited with the government. It mentions the FY (eg Financial Year 2019-20) as well as AY (corresponding Assessment Year 2020-21).
- Form 26AS is a consolidated tax statement that includes details of all TDS’ and advance tax, self-assessment tax or regular assessment tax deposited in the bank by you. Form 26AS can be downloaded from the IT website, after registering yourself. Tax officers rely on Form 26AS, so you must cross-tally amounts from Form 16A against Form 26AS to check if all TDS details are noted correctly against your PAN number (status must say ‘F’ and not ‘U’), because you will get tax credit for TDS, only if it appears in 26AS. Any discrepancy must be immediately reported to the erring authority, as this is your responsibility alone.
- Form 15G/ 15H can be submitted to the bank to avoid deduction of TDS, if you think your FD/ RD interest income will not cross Rs 10,000 in that financial year. 15H is for senior citizens. For 15G, your total annual income should not exceed Rs 150,000. Its misuse can invite a scrutiny.
- Financial transactions Reportable account (FTRA) or the Annual Information Return (AIR) is submitted by the bank or Property Registrar etc. to the Income Tax department, to enable them to track your high value cash deposits or withdrawals (Rs 10 lakh+ annually), purchases of stocks and bonds (Rs 5 lakh+), property (Rs 30 lakh+), credit card (Rs 2 lakh+) etc. If under scrutiny, you will be asked to match your physical records with the AIR.
How to avoid scrutiny?
You must include all sources of income in your ITR (Income tax return) viz.:
- Gross Taxable Income is Gross Total Income less all exemptions like HRA, LTA and conveyance that have been claimed. Do not claim exemptions over those allowed.
- Even if all your taxes are paid by the employer through TDS (OR) there is zero tax liability due to deductions like 80C or LTCG, if your gross taxable income exceeds Rs 250,000, you have to file an IT Return and that too before the 31 July due date, to avoid paying penalties.
- If your annual interest income from your savings bank account exceeds Rs 10,000 (Section 80TTA), bank will deduct TDS (Tax Deducted at Source), which will also be reflected in your Form 26AS.
- Interest from Fixed Deposits (FD) and Recurring Deposits (RD) is fully taxable. Also, if bank has deducted 10% TDS, and you fall in the 20 or 30% tax slab, you have pay the additional tax
- Life insurance income from maturity amount that is non-qualified under Section 80C/ 10(10D) has to be reported.
- Short term Capital Gains (STCG) on sale of stocks, mutual funds and tax-free bonds applies for transactions within 1 year of purchase. STCG must be declared and will be taxed a flat 15%, if STT (Securities Transaction Tax) is paid, under section 111A. However if STT is not paid, then STCG is as per IT Slab. Frequent trading in stocks invites profits to be treated as a business income and not STCG. Long term CG (Section 10(38)) and Dividend income is exempt from taxes. Short term Capital Loss can be offset against STCG or LTCG, within next 8 years.
- For income received in cash, it is important to maintain documentation like your bills or a year-end confirmation from your party.
- Linking your Aadhaar card to your PAN card is compulsory.
Income Tax eligibility on Gross Taxable Income
|Individuals and HUF||Above Rs 250,000 per financial year|
|Senior citizen’s (60-80 years)||Above Rs 300,000 per financial year|
|Very Senior citizen’s (80 years+)||Above Rs 500,000 per financial year|
Deductions allowed on gross taxable income:
Under Sections 80C/ 80CCC/ 80CCD/ 80CCG
A total up to Rs 150,000 can be deducted from Gross taxable Income. This clause must be used as a retirement tool! For eg., a combination of PPF (or ELSS), with NPS is a great option to get up to Rs 200,000 deduction on your gross taxable income.
|Public Provident Fund||Interest is tax free. Lock-in is 15 years, but partial withdrawal is allowed after 7 years. PPF for minors can be opened, but your and minor total cannot exceed Rs 150,000 for tax benefits (MoF circular F.7/34/88/-NS II dated 17/11/1989). If PPF is opened through GPO, then you have to open a savings account in their Core banking system (Dept of Post circular dated 8/10/15)|
|Equity Linked Savings Scheme (ELSS) Mutual fund||Locked for a minimum of three years. There is no tax payable after lock-in period|
|Bank Tax Saver FD/ HUDCO/ NHB/ NABARD/ Senior Citizen’s Saving Scheme||With a minimum 5 years term, but interest is taxable on maturity, as per IT slab|
|National Savings Certificate||Lock-in is 5 and 10 years, but interest is taxable on maturity, as per IT slab. No TDS deducted|
|Life Insurance Premiums||Annualized premium must be less than 10% of sum assured, for tax benefits on premiums under 80C and on maturity amount under Section 10(10D). Otherwise, subsequent income attracts 2% TDS, if more than Rs 100,000 in a financial year. Death benefits are tax-free.|
|Unit-linked Insurance Plans (ULIPS are insurance cover plus investment in equity/ debt)||Annualized premium must be less than 10% of sum assured, for tax benefits on premiums under 80C and on maturity amount under Section 10(10D). Partial withdrawal is allowed after 5 years.|
|Pension Fund with Insurance Co||(Section 80CCC) – No partial withdrawal allowed and maturity proceeds are exempt under Section 10(10D)|
|Pension scheme with Mutual Funds||Lock-in is 3 years|
|Post Office Time Deposit/ Monthly Income Account Scheme||Interest is taxable on maturity, as per IT slab. There is no TDS on interest earned.|
|Employee’s Provident Fund & Voluntary Provident Fund||Mandatory for employees and employers to invest 12% each. Lock-in is till retirement. Tax is payable, if withdrawal is before 5 years of continuous service. For PF deposits made after 1/4/2016, 60% of Interest on it is taxable during withdrawals, unless re-invested in pension annuity schemes.|
|Housing loan principal repayment||If property is owned jointly, both spouses can claim the deductions. But tax deduction will be reversed, if property is sold within 5 years of purchase.
Also, stamp duty and registration charges can be claimed under section 80C, for house purchased in that financial year.
|Sukanya Samriddhi||Account for the girl child can be opened before she turns 10 years – Proceeds are tax free and account can be closed when she turns 21. Interest rates are generally higher than that for PPF/ NSC|
|Children’s Education tuition fees||Maximum allowed is cumulative Rs 150,000. Does not include canteen and bus fees|
|National Pension Scheme (NPS)||In addition to 80C, maximum Rs 50,000 eligible for tax benefits (Section 80CCD). Lock-in is up to age of 60 years, and 40% of corpus is tax-free at maturity. An early withdrawal of 25% of the individual’s own contribution will now be tax free.|
|RGESS||In addition to 80C, maximum Rs 50,000 eligible for tax benefits (Section 80CCG). It was for first time equity investors only, but is withdrawn from 2017-18.|
Compound interest is the eight wonder of the world. Money grows fastest when it is tax-sheltered. For eg. when you change jobs, do not withdraw from EPF, but transfer it.
Other important sections: 80D/ 80DD/ 80DDB/ 80U/ 80G/ 80TTA/ 87A/ 80E
- Medical Insurance Premium (including preventative health check-up cost), up to Rs 25,000 for self
- Medical Insurance for parents (Premiums of Rs 30,000 for senior citizens)
- Deduction for severe and permanent disability, as certified & issued by the medical authority (upto Rs. 75,000)
- Higher Education Loan Interest Repayment (Sec 80E)
- Donation to approved fund and charities (Sec 80G) – subject to submission of PAN number of recipient
- Bank savings account interest – Section 80TTA deduction for up to Rs 10,000 per annum
- For total income less than Rs 350,000, a rebate of Rs 2,500 on tax payable is possible, under section 87A
- Gifts to non-working spouses and minor children are tax-free, but if it generates income, it can be clubbed with your income. Hence, invest in mutual funds, as it defers tax liability. Or invest in tax-free options in spouse’s name. That income can then be invested in FD’s, as income from income cannot be clubbed.
- Claim your LTC (Leave Travel concession) for domestic travel expenses (not available for hotels, food etc)
- There is a rebate of Rs 12,500 to all taxpayers (between income of Rs 250,000 to 500,000).
HRA (House Rent Allowance) for the salaried
- Under section 10(13A), those staying in rented accommodation, taxable HRA = actual HRA received – Exempt amount. To calculate exempt amount, use lowest of the three calculations viz. actual HRA OR (actual rent paid – 10% of basic salary) OR 50% of basic salary.
- If your CTC doesn’t contain an HRA component, deduction for rent paid is available from gross taxable income, upto maximum of Rs 60,000 pa (Sec 80GG). You have to correctly report in your ITR, the PAN number of the landlord and deduct and deposit 5% TDS, if your rent is above Rs 50,000 per month. PAN of the landlord has to be reported if annual rent is above Rs 1 lakh.
- Rent can also be paid to parents to claim in the exemption, provided rent is less than 10% of basic salary
- If HRA in not received, and flat is provided by the employer, then perquisite value of upto 15% of basic salary or actual rent paid by employer (whichever is less), has to be added to the salary
Other property related precautions
- Rental income from second home and also deemed rental income (even if second home is not rented) has to be declared. If property is jointly owned, then the rent income has to be reported in the ratio of their ownership. 30% of rental income can be deducted for maintenance of property and commission to agent. The deduction on home loans for properties given on rent will be capped at interest payment of Rs 2 lakh, which brings it at par with the deduction available to self-occupied houses.
- Housing loan interest payment and loan processing fees deduction under Section 24B is allowed upto Rs 2 lakhs, for self-occupied property, on accrual basis of accounting. For rented-out property, you can deduct full interest paid on loan. If property is owned jointly, both spouses can claim the deductions.
- Under Section 80EE, an additional deduction of Rs 1 lakh on interest is allowed for first-time property owners, for value of flat not exceeding Rs 40 lakhs
- Under Section 194IA, for sale transactions over Rs 50 lakhs for all immovable property (except Agricultural land), a compulsory 1% TDS of the total transaction value is to be deducted by the buyer, and can be paid online. The seller has to obtain Form 16B from the buyer to claim credit for his/ her tax liability.
- For property sold within two years or purchase, a Short term Capital Gains (STCG) applies as per your income-tax slab. For over 2 years Long Term Capital Gains (LTCG) applies, but can be avoided by investing in another house (or) tax exemption bonds under Section 54EC (or) ‘Capital Gains Accounts Scheme’ CGAS with a bank. But money deposited under CGAS must be used to buy a property within 2 years or construct another property within 3 years of original sale. Since many details are required for CGAS, it is difficult to evade taxes now.
- In reference to first-time home buyers, under PM Awaas Yojana, for annual income below Rs 6 lakh, there is an interest subsidy of 6.5% on a principal component of Rs 6 lakh, regardless of their total loan. So, if they borrowed money at 9% interest, they will pay only 2.5% interest on up to Rs 6 lakh principal, and the regular 9% on the remainder. For income up to Rs 12 lakh, the subsidy is 4% on a principal of up to Rs 9 lakh; and in the highest income category of up to Rs 18 lakh, interest subsidy is 3% on a principal of up to Rs 12 lakh.
Deductions for the Self Employed
- Can claim all expenses directly related to his/ her business, like rent (sec 80GG), repairs, office supplies, monthly telephone bills, Internet bills, travel expenses—both domestic and foreign—meals, entertainment and all hospitality-related expenses connected with the business.
- Mobile and Car expenses which are both for personal and business use can be claimed proportionately.
- Depreciation on cars, property, furniture, laptops etc can be claimed based on prescribed slabs
- For home offices, you can claim 30% of your electricity and landline telephone bill, and a proportion of rent.
- Expenses above Rs 20,000 should be paid using an Accounts Payee cheque.
- Fees or salary paid to other professionals can be deducted if you have paid TDS
Hindu Undivided Family (HUF)
Another legal way to save taxes is to create an HUF account. HUF is a separate legal entity and transactions can be done in the name of HUF, after applying for a PAN card and opening a bank account in the name of HUF. HUF can earn income from sources like investing in fixed deposits, mutual funds, shares, real estate etc. Moreover, HUF income upto Rs.2.5 lakhs is tax free and the excess, if any, is charged as per the prescribed Income tax slabs. HUF can also claim 80C Income tax deductions like Individuals, like in Tax saving fixed deposits or ELSS. A separate Income tax return has to be filed in case of HUF.
For example, if you have ancestral property and earning rental income on it, this income shall be taxed in your hands. This income is from an asset that belongs to the entire family. But, if you create an HUF, the rental income can be converted to Income of HUF and you can avail basic tax exemption upto Rs. 2.5 lakhs and hence save some of your taxes also.
- NR (Non-resident) under IT Act is different from NRI (Non Resident Indian) under FEMA. Foreign income and assets including property have to be declared, along with date of acquisition of asset and Aadhaar card number. It is better for PIO/ OCI residents to declare their foreign passport details.
- Expatriates in India for work are exempt from declaring their foreign assets.
- If DTAA (Double Taxation Avoidance Agreement) applies, then it has to be mentioned, but a TRC (Tax Residency Certificate) is required. Foreign tax credit is available under section 90/90A/91
Income Tax Return (ITR)
To know your IT centre, call 1961/ 1800-1801961 or by email. To know your Assessing Officer (AO) code through your PAN card, visit IT department website. All other info regarding PAN card application/ documents required/ data change/ etc is available online.
The different forms are as under:
ITR-1 (Sahaj) – For individuals with salary or pension income , one house property, other sources (Interest etc.) and having total income of up to Rs 50 lakh;
ITR 2: For Individuals and Hindu Undivided Families (HUFs) not carrying out a business or profession. This ITR has merged with older forms ITR 2/2A and 3;
ITR 3: For individuals and HUFs having income from a proprietary business or profession. It has replaced ITR 4
ITR 4 (Sugam): For presumptive income from Business & Profession. This form replaced ITR 4S
ITR-V makes e-Filing paperless – e-Filing is compulsory for income above Rs 500,000, or if claiming a refund or have foreign assets. But is easy and free on IT department’s website (www.incometaxindiaefiling.gov.in).
Identity of the person filing the IT return, can be verified electronically by:
- A unique EVC (Electronic Verification Code) is generated through your bank’s website and also at IT department website. EVC can be sent to your registered mobile phone or email ID and is valid for 72 hours. Some banks also allow ATM card to generate an EVC.
- Aadhaar card – An One time password (OTP) is generated but is valid for 30 minutes only.
Other important points to remember
- To avoid paying interest on late income tax payment under sections 234B/ 234C, it is better to estimate your income and pay advance taxes three times a year (15 September 30% of the tax liability; 15 December 60% and 15 March 100%). This is apart from the TDS (Tax Deducted at Source). You can pay advance tax through your bank OR through online through NSDL
- IT has the power to re-open assessment of past 6 years, so you have keep records of atleast past 8 years. These include all entries in your passbook like ECS dividends receipts etc. Gift and Loan confirmation letters with relevant PAN numbers have to be maintained too.
- Revised returns can be filed within 1 year from end of relevant FY (Finance Year)
- Please check status of an overdue tax refund online or at the IT call centre (1-800-4252229 or 080-43456700 or 080-22546500, from 8 am to 8 pm, Monday to Friday) or email.
- Specific reasons for delay of your tax refund could be incorrect bank account information or incorrect address information or a TDS mismatch between Forms 16 and 26AS. You can try to rectify the error at the website under “My Account”. Also, if there is a pending outstanding demand, refund can be either delayed or adjusted against that prior demand.
- IT department gives internal performance appraisals, based on how fast the officer issues refund. But it is your responsibility to ensure correct details are entered in the IT returns
- If your refund is delayed, one can file an RTI (Right to Information) application with the IT department or approach the IT Ombudsman
This article has been compiled by using information from various sources like Economic Times, Mint, Moneylife, Business Standard and the personal experience of the author of this website. Please do not use this article as a replacement for legal opinion.