Where did Anands go wrong? The new flat is registered only in Anand’s name, so the capital gains booked by his wife from the sale of the jointly owned flat remain uninvested and, hence, are taxable.
This is just one of the many slip-ups that could result in a notice from the income tax department. The tax authorities have spruced up their efforts to catch the evaders. The new ITR forms seek detailed disclosures, leaving no scope for taxpayers to conceal income in their returns.
Moreover, the Central Board of Direct Taxes (CBDT) has made it mandatory for everyone to file their returns online, barring super senior citizens above 80 years of age. The tax records are integrated online, so even a small mismatch in detail can be detected and can result in an enquiry.
However, not all tax notices should be a cause for concern. For instance, in the case of the Anands, the purchase was made in December 2018. So they are yet to file returns for financial year 2018-19.
“The tax department usually issues notices after the return has been filed or after the assessment year has ended. This seems to be a gentle reminder that the wife should file her ITR and pay tax by disclosing this transaction,” says Karan Batra, a Delhi-based chartered accountant. “Tax authorities have started sending such intimations to a lot of assessees,” he adds.
Similarly, simple calculation errors may get you a demand notice, asking you to pay due tax. However, in the case of serious transgressions, your returns will not only be picked up for scrutiny assessment but also slapped with hefty penalties.
In the following pages, we have listed out some tax filing mistakes that can result in a notice and the steps taxpayers should take to avoid getting one.
- Changes in ITR forms
Multiple changes have been introduced in ITR forms for the assessment year 2019-20. The new forms seek detailed disclosures to plug tax leaks.
Until last year, you had to report a consolidated figure under the ‘income from other sources’ head. This year onwards, interest income from your deposits (fixed deposits and recurring deposits), bank accounts, income tax refund and pass-through income has to be declared separately under each head. This means that you can no longer hide or declare selective interest income in your returns.
“Taxpayers often quote unawareness about taxability of interest income as the reason for not reporting it correctly. With all the sources of interest incomes listed individually, this excuse is no longer valid,” says Sandeep Sehgal, Director, Tax and Regulatory, Ashok Maheshwary & Associates.
If you have sold immovable property, you also have to share PAN details, address and share in percentage, among other details of the buyer. “The onus of giving correct details of the buyer in the ITR form is on the tax filer. If there is any discrepancy in the buyer’s details, the tax filer can get a notice,” warns Sudhir Kaushik, CFO and Founder, Taxspanner. com. This also means that the taxman has one more way of getting your details if you are the buyer.
In another change, details of unlisted shares held at any time during the financial year must also be provided. “Those who hold employee stock options (ESOPs) in their unlisted company will get affected by this. Even shares listed outside India are covered under this option and may have to be disclosed,” says Archit Gupta, Founder and CEO, Cleartax.in.
The scope of disclosure for foreign assets has also been expanded. Under the new columns of depository and custodian accounts, you must report assets and bank accounts where you are a beneficiary or signing authority. If you have worked abroad, you may have an insurance policy or annuity contract. “People who go abroad for work often get enrolled in overseas social security plans. Such plans qualify as overseas assets and need to be reported in schedule FA,” says Kuldip Kumar, Partner and Leader, Personal Tax, PwC.
Equity and debt interest from overseas investments is the other new entrant that needs to be reported very carefully. “A lot of information gets automatically exchanged between countries under the information exchange agreements. In case of a mismatch in information, the return might be picked for scrutiny,” cautions Kumar.
Since the new forms seek detailed disclosures, you should start collecting all your bank account statements, records of financial transactions and documents related to foreign assets much before the last day of filing returns. Failure to report any information amounts to concealment of income and is liable for stiff penalties.
- Misreporting LTCG on equity
This is the first year when taxpayers will report long-term capital gains (LTCG) from equity investments. LTCG above Rs 1 lakh in a year will be taxed at 10%. These gains are to be reported in schedule CG, section B4. You don’t need details of dates or name of the security transferred, but have to key in accurate details about total consideration value, fair market value (FMV) and cost of acquisition. You can easily get the statement on capital gains from your broker or mutual fund house.
How to report LTCG from equities in your tax return
- 4a The amount you receive on selling the stock.
- 4bia Will be auto populated on the basis of iA and iB.
- iA Buying price of the stock.
- iB Will get populated on the basis of B1 and B2.
- iB1 Grandfathered price of the stock. FMV of a stock is its highest trading price on the exchange on 31 Jan 2018. For a mutual fund, it is the NAV of the fund on 31 Jan 2018. This can be found on the AMFI website.
- iB2 Selling price (same as 4a).
- 4bii If you have modified the stock so that its value has enhanced, the cost incurred in doing so has to be filled here.
- 4biii Broker’s commission can be claimed as a deduction. Fund houses give the fi nal payout after adjusting this expense.
- 4biv This is your total cost of acquisition. Will get auto populated
- 4c This is capital gains after deducting selling price from cost of acquisition. Will get auto populated.
- 4d This is net capital gains after deducting the Rs 1 lakh threshold. Will get auto populated.
- 4e Exemption under Section 54F can be claimed if you reinvest the sale proceeds from this asset to buy or construct a residential house.
- 4f This is the net taxable capital gain you have to pay tax on. Will get auto populated.
Reporting LTCG on equity gets tricky if you have sold more than one stock or MF units as the form allows you to fill details of only one transaction. The cost of acquisition is computed by the form on the basis of FMV and actual purchase price. When multiple stocks are sold, both FMV and purchase price of each stock will be different. So how do you determine the net cost of acquisition? There is no single correct way to tackle this.
“The taxpayer will have to calculate capital gains of each stock separately to arrive at net gains. He should fill the cost of acquisition, full value of consideration and FMV in such a way that the final capital gain in the ITR form, shown in 4c, matches with the actual gains he has calculated,” suggests M. Pattabiraman, founder of financial education blogsite, Freefincal. Though doable, this exercise can be time-consuming and entails a high probability of error.
“Reporting LTCG on equity in the current form is complex and the calculations can be cumbersome for the taxpayer,” says Sehgal. Heena Arora, Marketing and Finance Head, All India ITR, concurs. “Taxpayers are likely to go wrong in picking the correct FMV and will get the cost of acquisition wrong. A mismatch between the declared gains and actual gains can get you a notice,” she says.
You can take the help of a qualified professional to sail through the process. In online portals that allow free self-filing, you just have to upload the capital gains statements that will automatically populate your LTCG. “This approach will reduce the chances of human errors and avoid misreporting,” says Gupta of Cleartax. “The tax department will, hopefully, simplify this section soon,” he adds.
- TDS on property deals
From 1 June 2013, any buyer who has purchased an immovable property worth more than Rs 50 lakh has to deduct 1% TDS from the payment to the seller and deposit it in the government account. However, just a timely payment may not be enough to save you from the taxman. Experts say that every year several notices are issued to taxpayers on account of calculation errors in TDS.
“TDS has to be deducted on each payment, including advance, instead of the final payment. This is where most taxpayers go wrong,” says Batra. In the case of staggered instalments, you will be required to deduct TDS on each payment and pay it through Form 26 QB within 30 days of the date of deduction.
Your work doesn’t end here. You have to get correct PAN details of the seller and issue Form 16B to him in time. Delay in filing or submission of either form will not only get you a notice but also attract interest and late fees of Rs 200 per day. In case of more than one seller, you have to deduct TDS from the payment made to each seller and file separate Forms 26QB for each. “Similarly, if there are two buyers, both will have to deduct TDS separately and file separate Forms 26QB,” says Batra.
TDS liability on rent and property purchase
*To be filed within 30 days of the end of month in which TDS is deducted. **Should be issued to the seller or landlord within 15 days of the due date of filing TDS.
- Not deducting TDS on rent
The government extended TDS on rent to all salaried individuals and HUF in 2017. Earlier, it was applicable only to those who are required to get their accounts audited as per the tax laws. If you pay rent above Rs 50,000 per month, you have to deduct 5% TDS from the rent paid to the landlord and file it at the end of the financial year.
The rule should not be taken lightly. “Non-deduction of TDS is non-compliance with the tax law. The tax filer may have to pay a penalty equal to the TDS amount,” warns Gupta.
Just like TDS on property, calculation error or incorrect information can also land you in trouble with the taxman. One common mistake is to calculate TDS on the total rent paid in a financial year instead of every month. “The condition of TDS is often misconstrued as applicable to rent above Rs 6 lakh per year. In reality, it is for rent above Rs 50,000 per month,” says Batra.
So, if the rent was over Rs 50,000 only for a few months in a year and total annual rent is less than Rs 6 lakh, one may not file the TDS thinking it’s below the minimum limit. However, since the landlord will report his rental income in his returns, you will come under scrutiny.
“Wherever TDS is deducted, the tax department has information on the PAN details of both the deductee and the deductor. In case of a discrepancy between the information reported by the two parties in their forms, a notice may be issued,” says Gupta. In the above example, the tenant has to deduct 5% TDS only for the months that the rent amount exceeded Rs 50,000.
- Mismatch in income, expenses
The IT Department will now pry into your social media accounts to detect any gap between your expenses and reported income. If posts related to foreign holidays, luxury cars, 5-star stays or lavish social events do not fall in line with your declared income, you could be in a pickle. “If your spending pattern is not commensurate with the income disclosed in the ITR, you will have the taxman knocking at your door,” says Rakesh Nangia, Managing Partner, Nangia Advisors (Andersen Global).
Until now, the IT department depended largely on annual information return (AIR) by banks, credit card companies, mutual funds and registrar (for real estate deals) for information on high-value transactions. Data culled from social media will make it easier for the authorities to validate AIR information.
“By using big data and automation, authorities will be able to keep a better watch on high-value transactions,” cautions Kumar. Even a slight discrepancy between what you claim to earn and what you actually spend will get you on the taxman’s radar.
However, experts say this should worry honest taxpayers. A working professional with a travelling job can spend beyond the annual limit by a credit card. He has to spend regularly on flight, hotel and commute, which the company reimburses later.
However, the credit card company records expenditures as high-value transactions and may report it in AIR. Or, you may have received a large sum as a gift but missed reporting it in the return. Such expenses can raise taxman’s suspicion but if you have documentary evidence, you should not get flustered. “Taxpayers should preserve the relevant bills and documents to explain the transaction in case of an enquiry from the tax department,” says Kumar.