Every year taxpayers not just in lakhs but in crores file their income tax return. Majority of them have done it more than once. For others, it is the first step towards their annual tax compliance journey.
Whether you are a first time tax return filer or a seasoned one, there are some things that anybody can go wrong with. But if we have some facts listed out in front of us, it may help us avoid making such mistakes.
Here are the Top Tax Filing Mistakes that most individuals make while filing tax returns.
- Compromising Confidentiality of Tax Data: Many companies in the income tax filing market are offering ITR filing for free. Since the free filers do not have any accountability to protect your data, they often compromise the confidentiality of the sensitive information shared by you. Many of them have become the go-to point for those looking at selling financial products. These product sellers include commission agents and insurance policy sellers. ITR filing involves your personal financial data. Ensure that it is not misused by such free filers or product sellers.
- Not filing returns at all or filing returns with wrong ITR form: Return filing is mandatory for every individual having an annual income above Rs. 2.5 lakh. So make sure you file return even if you can claim the entire Rs. 2.5 lakh in deductions such as life insurance premium, Public Provident Fund, education loan interest, etc. It is also important to declare the correct income (including foreign assets) in the correct ITR form. There are seven forms, out of which only four are applicable to individual taxpayers. Filling of an incorrect ITR form leads to a defective return notice and the return is deemed to be not filed.
- Not claiming most applicable deductions like deduction u/s 80TTA due to lack of awareness: Most return filers, especially senior citizens, are not aware of deduction u/s 80TTA. Under this deduction, savings bank interest upto Rs. 10,000 is exempt from tax. However, many return filers do not claim this deduction and end up paying advance tax on this interest income unnecessarily. Another similar mistake made by most return filers is to claim interest on Fixed Deposits (FD) u/s 80TTA. Only interest from savings bank and post office deposits is exempt u/s 80TTA.
- Closing bank accounts whose details are mentioned in ITR to claim refund: It is mandatory to give bank account details – bank account number and IFSC code - in your ITR, even if you do not have any refund. Returns with bank account numbers having less than 9 digits will get rejected. Also, refunds will now be directly deposited in bank accounts and there would not be any cheque payments. If you are expecting refund, prefer to share details of such a bank account in your ITR which you are most likely to retain. Moreover, this year it has been mandatory to disclose in the income tax return, details of all the bank accounts held in a taxpayer's name.
- Not matching ITR data with income tax department’s database: Verification of ITR with the IT department’s database is important because all the transactions are scrutinized by the department. Any mismatch will surely lead to a notice. For example, if you have changed jobs during the year, both employers will give the tax benefit of basic exemption and deductions to the employee and hence less TDS would be deducted from the salary. This leads to additional tax liability at the time of filing returns. In case you do not report the previous employer’s income in your tax return, you are liable to get a notice.
- Not reporting all sources of income like bank’s interest income: It is a common misconception that the interest income from savings or fixed deposit accounts is not taxable or that tax has already been deducted on interest income by bank. Banks only deduct 10% TDS on interest income, whereas you may be in the 30% tax slab. It is very important for taxpayers to disclose the amount they receive from other sources like Interest income, Rental income, Interest on income tax Refund at the time of filing returns. Any such default can lead to notice and penalties to the extent of 300% of the tax evaded.
- Not reporting exempt income: Several incomes such as PPF interest, LIC maturity amount, dividends and long-term capital gains on listed securities are exempt from tax. However, you must report these in your tax return since their details are provided to the IT department by companies and brokerage firms.
- Not being aware of the latest tax rules: Most taxpayers have knowledge of the basic exemptions and deductions under the Income Tax Act which help in reducing their taxable income. However, what you miss on, are the small but important changes that are introduced through Budget announcement, notifications and circulars each year. Being aware of these options helps in availing all the possible benefits while filing your return. Click here to read the ‘How new income tax returns forms will simplify your tax life’.
- Not submitting ITR-V: The one-page acknowledgment you get after e-filing is called ITR-V. Sending the signed copy of ITR-V by post within 120 days of e-filing is the only physical leg in e-filing. Otherwise, the return will be deemed to be not filed. Do not forget to follow all the Do’s and Don’ts regarding ITR-V submission. Also, make sure that you have received the acknowledgement email of receipt of your signed ITR-V at CPC on your registered email id. This year, an option to e-Verify the return instead of sending the signed ITR-V to CPC has been notified.
- Providing incorrect communication details: Since all communication by the income tax department is now done via email, one should make sure that a valid and functional email ID is provided in the tax return form. You should avoid giving official email id in your ITR as it becomes invalid once you leave the organisation. You should give your own Mobile number for the same reason. And most importantly, wrong PAN leads to failure in return submission. One should always get these three updated in the ITD database in case of any changes or mistake.
Few other common tax filing mistakes are as follows:
- Trying to file separate ITRs for multiple Form 16s issued for the same assessment year, instead of showing all the Form 16s in a single return. Correct way here is to add both salaries and pay tax on combined income. One should neither ignore income from previous employer nor claim deductions and exemptions twice.
- Not reporting all your foreign assets along with account details, especially if there is little balance in a foreign bank account or there was no income during the financial year.
- Not reporting notional rent from a second house property which is lying vacant. This notional rent is to be added to your income and tax is to be paid accordingly.
- Reporting wrong TAN of employer/deductor in the return, leading to demand notice from the income tax department.
- Not preparing books of accounts while filing ITR 4, especially for commission earned by insurance agents.
- Choosing incorrect assessment year while paying self assessment tax online.
- Claiming TDS of interest received on FD which was created in spouse/minor’s name using your own funds, can lead to demand notice since in reality the credit of this TDS is given to only spouse/minor.
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