Once you have filed your income tax return, the income tax department processes your tax return. If a discrepancy is found, the department will issue you a tax notice. Here are 5 reasons for receiving tax notice and how to deal with it.
Will you get an income tax notice?
The income tax department has identified lakhs of people who have not filed their tax returns. Many of them are innocent offenders, who may not even know they are supposed to do so. ET Wealth reached out to tax experts to understand the factors that can lead to a tax notice. Here are the main reasons:
- Mismatch in income and investments, expenses
If there’s a mismatch between the income you have declared in your tax return, and your investments and expenditure, you are likely to get a scrutiny notice. Banks, mutual funds, credit card companies and other establishments are supposed to report certain high-value transactions to the tax department. They have your PAN and other details, so there is no way one can sneak past them.
- TDS not credited to taxpayer
You could get a notice if there is a mismatch in your TDS and income details. Check your Form 26AS online to verify if all the tax deducted on your behalf has been credited to you. “You should check it at least once a quarter and reconcile the entries with your own records,” advises chartered accountant Surya Bhatia.
- Sharp drop in income
One obvious red flag is a sharp drop in the income of the taxpayer. This can be for a variety of reasons, but it immediately alerts the tax department. However, this is more common in case of businessmen and traders. For salaried people, it could be because the taxpayer lost his job, took leave without pay or went on a sabbatical during the year. More often, it is because he changed jobs mid-year and declared income from only one employer. This is a sure reason for getting a tax notice.
- Exemptions sought are very high
Refunds are almost considered an anathema by the tax department. Suspicions are aroused when you claim too big a refund in your return. While this is usually in case of businessmen and traders, a salaried taxpayer may find himself in this situation if he has not furnished the proof of his tax-saving investments and other deductions to his employer on time. If tax has already been deducted and deposited with the government, the only way is to file a return and claim a refund. If the refund is too big, expect a scrutiny notice.
- Not filed the tax return
Thousands of individuals don’t know if they have to file their return. Some believe they can skip filing if TDS has been paid. Others believe that if their income falls below the basic exemption limit after availing of various deductions, they don’t need to file returns. “Even if the TDS has been deducted, you are not absolved from filing your tax returns,” says chartered accountant M.K. Agarwal. Some taxpayers who file their return online without digital signature think their work is done once the tax return is uploaded. They don’t realise that if the ITR V is not submitted within 120 days of uploading, the return will be deemed invalid.
(Originally published on April 29, 2013)
How to deal with a tax notice
Here is a checklist of things to do when you get a notice.
- Preserve envelope: The envelope has the Speed Post number, which shows when the notice was posted and served.
- Check PAN details: Maybe the notice was meant for someone with same name. Check your PAN details.
- Make copies of notice: You can’t afford to lose the notice, so make photocopies or scan and store it on your computer.
- Check validity: A notice under Section 143(3) for scrutiny assessment has to be served within six months of the end of the financial year in which the return was filed. If served later, it will be deemed invalid. However, a notice served under Section 148 can reopen a case even up to six years if the assessing officer (AO) suspects evasion. If the sum is less than Rs 1 lakh, only 4-year-old returns can be reopened.
- Check sender’s details: A notice must have the name, designation, sign, stamp and official address of the sender
- Organise documents: Some returns are picked up for scrutiny at random. Don’t panic, but compile all documents.
- Seek professional help: If it is just a simple demand notice for excess tax, an individual can handle it himself. If the matter is a little complicated, it is best to take a professional’s help. You may be required to appear before the AO to explain any discrepancy in the return or make a clarification. A professional can help you organise your response so that you can provide cogent and specific clarifications.
Types of notices
An individual can receive a tax notice for a variety of reasons. Here is what the notices under different sections mean.
|131(1A)||Assessing officer has reason to suspect that income has been concealed.|
|133A||For survey or scrutiny of accounts.|
|142||For not filing income tax return. For scrutiny of accounts and documents in support of the return filed by taxpayer|
|143(1)||For adjustment or additional tax demand if an error or incorrect information is detected in the return filed by taxpayer.|
|143(2)||For regular assessment after detailed inquiry by assessing officer.|
|148||For reassessment if assessing officer believes some income has escaped assessment.|
|156||For dues (tax, interest, penalty, fine or any other sum) payable by the assessee.|
(Originally published on August 11, 2014)
7 ways to earn tax-free income
Use these strategies to make the most of opportunities offered by tax laws and reduce your tax liability.
- Use indexation to nullify tax
High inflation has been a curse for investors in the past few years, but for some, it has been a boon. Tax rules allow investors to adjust cost of an asset to inflation during the holding period.
- Invest through a non-working spouse
If you gift money to your wife and it is invested, the taxman will club the earning with your income for the year. But if you invest in tax-free instruments, there is no tax implication.
- Avail of minor exemption
If you invest in a child’s name, the income is clubbed with that of the parent who earns more. However, there is a small Rs 1,500 exemption per child per year from such investments. If you have two children, you can avail of an exemption of up to Rs 3,000 for interest earned on investments in their name.
- Take help of an adult child
After 18, one is treated as a separate individual for tax purposes. His earnings are no longer clubbed with his parent’s income. Save tax by investing in the name of an adult offspring.
- Parents can help too
Your parents can also help you avoid the tax net. If any or both of your parents do not have a high income, while you are in the highest 30% tax slab, you can invest in their name to earn tax-free income. Such income is not clubbed.
- Revive your forgotten ulip
Most of us have Ulips in our portfolios and many of us have stopped paying the premium. If you are part of this crowd, you can use your Ulip to earn tax-free income. Pay all the pending premiums at one go and earn tax-free returns.
- Form an HUF with inherited wealth
Double your basic exemption and savings limit simply by establishing a Hindu Undivided Family (HUF). The tax authorities treat the HUF as a separate entity. It is entitled to the same tax benefits.
(Originally published on February 4, 2013)
Five confusing pairs of income tax terms
As you prepare to file your income tax returns this year, don’t be stumped by the terminology in ITR forms or Form 16.
Financial vs assessment year
- Financial year: This is the year in which you earn your income and also pay taxes on this earned income. A financial year starts on 1 April and ends on 31 March. So, if you have earned income in 2017-18, it will be considered the FY.
- Assessment year: This is the year following the financial year, in which your income is assessed. This also lasts from 1 April to 31 March and is the year in which you file your returns for the taxes paid in the relevant financial year.
Advance vs self-assessment tax
- Advance tax: If you are a salaried taxpayer with other sources of income, and your tax liability for the financial year exceeds Rs 10,000 after accounting for the tax deducted by employer, you will have to pay advance tax. This has to be paid in the FY preceding the AY in four instalments, as applicable.
- Self-assessment tax: While calculating your tax liability, if you realise that some tax is due after taking into account the TDS and advance tax, then you pay self-assessment tax. This tax is paid in the assessment year before filing the returns.
TDS vs total tax
- Tax deducted at source: This is the tax that is deducted from your income at the source of that particular income, be it by your employer on salary, or by the bank on deposits. The rate varies for different sources and types of incomes. The TDS, however, may not be the total tax that you are liable to pay.
- Total tax: This is the total tax that you pay on your entire income received from all sources and could be more than the TDS by your employer or other income sources.
Gross total vs total income
- Gross total income: This is a total of all forms of incomes, including income from salary, property, business or profession, profits or gains, and other sources like interest, etc. From salary, the exempt allowances under Section 10, are deducted, and other incomes added, to arrive at the gross total income.
- Total income: This is the income arrived at after deductions under Chapter VI-A, which includes Sections from 80C to 80U. The final figure arrived at is subject to tax.
Exemption vs deduction
- Exemption: This amount is excluded from the gross total income. Available under Sections 10 or 54, the benefit is from a specific source of income, like salary or sale of property, not the total income. The amount is deducted from the income before calculating tax.
- Deduction: This is the reduction in total taxable income through benefits under Chapter VI-A, Section 80. The amount is reduced by investing in or spending on specific avenues.
(Originally published on July 23, 2018)