Here are five blunders that can invite a tax notice, a penalty or both. Though interest earned from fixed deposits, recurring deposits, even tax-saving bank deposits and infrastructure bonds, is fully taxable, people often do not report any interest income below Rs 10,000. The exemption of Rs 10,000 a year under Section 80TTA applies only to the interest earned on the balance in a savings bank account.
Another common misassumption is that one need not pay tax as TDS has been deducted on the income. What people forget is that the tax deducted by the bank at source is at a flat rate of 10 per cent. The department can catch such mistakes by matching your ITR with Form 26AS. The penalty is more severe (up to 200 per cent of the tax evaded) as it is not a mis-calculation, but concealment of income. Many people invest in the names of spouse or minor children.
There is no limit to the amount you can give your spouse, but if you invest the gifted money, Section 64 of the Income Tax Act, a provision for clubbing income, comes into play. Under this, any earning from the gifted amount is added to your taxable income. For a minor child, the earning is treated as income of the parent who earns more. You also get an exemption of Rs 1,500 a year, per child, up to a maximum of two kids. If you want to escape tax, invest the gifted money in a tax-free option, such as the PPF or ELSS scheme. Or invest in the name of your parents or a major child, where clubbing provision does not come into play. If you think you don’t need to file returns because you don’t have a tax liability, you are mistaken.
This exemption is only for those with an annual gross income below the basic exemption level of Rs 2.5 lakh. Anyone with an income above this has to file a return. The basic exemption is Rs 2.5 lakh per year for people below 60 years, Rs 3 lakh for senior citizens above 60, and Rs 5 lakh for very senior citizens above 80. The rest, including NRIs, have to comply. If you fail to file your return in time, the assessing officer may levy a penalty of Rs 5,000 under Section 271F.
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