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Saturday, December 21, 2013

How to avoid a notice from Income Tax Deptt

Ignorance of law is never an excuse, especially if it relates to financial ignorance. Are you wary of getting a notice from IT Dept even if you are not deliberately avoiding taxes? There are high chances, if you do not know the tax laws. But you can take certain fundamental precautions to avoid the on...

In recent months, thousands of taxpayers have been served notices after discrepancies were noted in their tax returns or their TDS details. This sudden rise in the number of tax notices is not because people have stopped paying tax or filing their returns. It's just that the tax authorities now have a set of integrated databases on taxpayers and can track all financial transactions. Here are some precautions that you can take to easily avoid any such notice coming your way.

1. Not checking Form 26AS before filing
Form 26AS has details of the income tax paid by an individual during a financial year. You can easily access your Form 26AS online. Some banks also provide this facility to their Net banking customers. If your bank, bond issuer or employer has deducted TDS, make sure it is mentioned in your Form 26AS. Also, check whether all the investments with TDS have been duly mentioned in the tax return. If 10% TDS is accounted for FDs or savings interest in Form 26AS and your total income falls in a higher tax bracket, make sure that you have paid the relevant differential taxes yourself. Any mismatch might lead to a notice from the department.

2. Mismatch in income and expenses & investments
Financial services firms, registration authorities and merchant establishments are supposed to report certain high-value transactions to the CBDT. The Income Tax Department gets all information on the basis of your PAN. The CASS matches this information with the returns filed by the taxpayer and promptly issue a notice if there is a mismatch in the income you have declared and your investments and spending.

3. Not filing returns if income is above 2 lakh
If your gross taxable income before deduction under any section is above 2 lakh, it is mandatory for you to file your return. If you don't file it, you can be slapped with a penalty of up to 300% of the outstanding tax. Even if there is no tax liability, you have to file the return if the gross income before various deductions is more than the basic exemption limit.

4. Not filing return by the due date
You can file your income tax return till the end of the assessment year if there is no tax due. For example, the tax return for 2012-13 can be filed till 31 March 2014 without incurring any penalty if the tax has been paid. But if some tax remains unpaid, filing your return after the deadline could lead to a penalty of 5,000. Also, you are not allowed to carry forward losses or revise the return if you file after the due date.

5. Not declaring the previous employer's income
This is a common problem and was easily missed by the tax authorities in the past. If someone has changed jobs during the year, he was able to get the basic exemption of 2 Lacs from each employer. However, now since the tax databases has been integrated , don't think you can ignore your income from a previous job. If your earlier employer deducted TDS on your income, the details would be in your Form 26AS, and the CASS will immediately flag this discrepancy. You can be levied a penalty of up to 300% of the tax evaded.

6. Avoiding TDS by misusing Forms 15G and 15H
If the interest income on bank deposits exceeds 10,000 a year, the bank deducts TDS. You can avoid TDS by submitting Form 15G or 15H if you are not liable to tax. However, if you are trying to avoid TDS, you can get a notice from the tax department. Submitting a wrong declaration can invite a penalty of 10,000. Splitting the deposits in different banks or branches to avoid TDS won't help as the PAN gives you away.

7. Not declaring interest on deposits and savings
The interest earned on bonds, fixed deposits, recurring deposits and savings accounts is taxable and should be mentioned in your tax return. Up to Rs.10,000 earned on your savings bank account is free from TDS, but it still needs to be included in your total income for the year. Likewise, the PPF interest income is tax-free, but should be included in the exempt income.

8. Not mentioning PAN or quoting incorrect PAN
The PAN is now mandatory for high-value transactions . If you do not submit it while making an investment or taking up a job, your income will be subjected to a higher TDS of 20%, instead of 10%. If the PAN is incorrect, you could even be slapped with a penalty of up to 10,000. The bigger problem of an incorrect PAN is that the TDS will not be credited to your account. What's more, the tax refund can be credited to another account if you submit the wrong PAN.

9. Not responding to notice from tax department
Don't ignore the messages and notices from the tax department. If you do not respond, the interest and penalty keeps on increasing in case of any pending tax liability and the Income Tax Department will take a final decision that may not be beneficial for you.


Manoj Arora
Lead a Financially Free Life !!