Do you know why Aamir Khan’s Lagaan is one of the most celebrated movies of all time? The 2001 movie not only instilled the feeling of patriotism and catered to the imagination of a cricket-fanatic country but also made everyone jump with joy, thanks to the complete tax exemption for 3 years awarded to the villagers of Champaner.
Tax respite for Bhuvan and his village hit us right in the feels as we all secretly crave for tax exemptions. The truth is that no one likes to pay taxes but since it is the law of the land, everyone is obliged to follow it or else face the consequences. Now that there is no escaping from tax payment, it is important to file your taxes and returns to avoid penalties and tax notices.
Here are 8 common tax defaults that can land you in trouble ( some of these are very serious):
- Tax Return not filed
Every taxpayer has to file a tax return if his income is over Rs. 5 lakh. Even if your taxable income is zero or you have paid all your taxes, it is mandatory to file a return if you earn more than Rs. 5 lakh. While failing to file your tax return is not a serious default, you will receive a notice from the Tax Department urging you to do so. But if you have not paid your taxes, then get ready to pay the unpaid balance along with interest and a penalty of up to Rs. 5,000.
- Not taking the interest earned into account
A majority of taxpayers have this misconception that the interest earned from various savings schemes is non-taxable. Interest earned from tax-saving schemes, Fixed Deposit, Recurring Deposit etc. is taxable and it should be added to the income. However, the total interest earned up to Rs. 10,000 from various savings accounts across different bank branches is exempted from tax. Many of us make this mistake of assuming that the bank will take care of the tax payable through TDS deduction. While TDS is 10% for income up to Rs. 10 lakh per annum and 30% for income over 10 lakh, not adding the interest earned to the income can lead to a major tax goof-up.
- Tax Benefits reversed due to selling your house before five years
If you plan to sell a house that you bought less than five years ago, we suggest that you reconsider it. Our government offers a lot of tax rebate for people who buy houses using a Home Loan. Under Section 80 C, one can enjoy tax deduction for principal repayment of the loan. However, if you sell the house within five years, then all the tax benefits availed through principal repayment under Section 80C will be rolled back and reversed. This means, you will have to pay for all the tax deductions you enjoyed, due to repayment of the Home Loan. It cannot be hidden, as the buyer will look to avail tax deductions for the same property.
In case of an insurance policy, all the tax benefits will be reversed if you end the policy within 3 years of its purchase. If you fail to pay the reversed tax benefits, it leads to tax defaults.
- Failing to count the income from your previous job
One of the most common and grave mistakes committed by taxpayers is failing to take income from their previous job into account. You need to file returns for income earned in a particular financial year. It doesn’t matter how many jobs you held. And if the unpaid tax is more than Rs. 10,000 when the return is filed, then the interest of 1% per month in the form of penalty is payable along with the tax-payment balance.
- Not paying TDS on buying a property
Not many are aware of this, but when you buy a house which is worth more than Rs. 50 lakh, 1% TDS is deducted from the amount payable to the seller. And if the seller is an NRI, then 30% TDS is deducted from the final amount payable to the seller. If you buy a house from a builder, then TDS is automatically taken care of. But when you buy it from an individual, you have to take the pain of calculating the amount to be paid to the government through TDS. The actual sale price of the property, excluding brokerage and stamp duty fees is subjected to 1% TDS. This TDS deduction is a form of tax payment on behalf of the seller. If you are planning to pay the total amount in EMIs then TDS needs to be deducted in each instalment.
- False Declaration with Form 15G and 15H
If you think you can fool the government by finding loopholes in the tax payment system, then hard luck to you, smarty pants! Many ‘smart’ individuals split their income and put it in different banks, and later falsely declare to the banks that their income is lesser than the TDS tax exemption slab by submitting forms 15G and 15H.
Under declaration through 15G, you state that your total income is lesser than the tax exemption limit of Rs. 2.5 lakhs and the interest earned by you through various schemes is lesser than Rs. 2.5 lakh. Under declaration 15H, you state that you are a senior citizen and your taxable income comes under the tax exemption limit of Rs. 3 lakh per annum. If these declarations are found to be false, it could lead to serious problems like serving a jail term (minimum of three months to two years).
- Violations of clubbing your income
In order to save money, you can indulge in tax-saving investments like buying a property or opening a Fixed Deposit under your wife’s name or minor children’s names. However, the income earned from the investment needs to be added to your income and is taxable.
The investment in the name of your spouse and kids is non-taxable, but the interest earned from it is taxable. If you have invested in your minor child’s name, and if both the parents are working, then the interest from the investment gets added to the income of the parent who earns more. So, interest and income from investments made under your spouse and kid’s name needs to clubbed with your income. Failing to do so is a tax violation.
- Not declaring foreign assets
Gone are the days when one could buy assets in foreign countries and not report about it to the Government of India. With countries working together to stop black money, one has to be precise about their foreign assets and investments. False reporting about investments made in foreign countries will be treated as a punishable offence under the Black Money Act and can lead to a penalty of at least Rs. 10 lakh for even a small misappropriation of foreign assets. One simply cannot get away with black money anymore.
Additional Reading: List of Taxes Levied by the Indian Government
Whether you have been knowingly or unknowingly committing any of these tax defaults, it is high time to open your eyes and stop making these mistakes to stay out of Income Tax troubles. Got it? Invest wisely!