How to avoid accumulating Black Money Unwittingly?
There are instances when people intentionally hide their incomes from tax and accumulate black money, but even people who honestly pay taxes on their income unwittingly stashes black money.
These honest taxpayers do not possess any intention to accumulate black money but with the lack of knowledge they do stash black money. Let?s see how small or notional incomes that we neglect can result into black money.
1. Notional Income from House Property
The love for Real Estate of Indian?s is well known. With the advent of easier home loans the appetite of buying homes has increased tremendously. Earlier owning one house is considered enough but now owing more than one house is common. The investment in real estate has transformed from just being a place of live to a powerful asset.
But many are not aware that second house property attracts tax even if it not let out. This means, even if your second house property is not occupied and there is no rental income from it, the estimated/notional annual rent has to be calculated and tax has to be paid accordingly. This is not enough; you have to pay wealth tax on the second house if it remains vacant.
To give a breather, there are certain deductions allowed from this notional rental income namely Municipal Taxes Paid, standard deduction of 30% and interest on the housing loan.
2. Fixed Deposit Interest
Bank Fixed Deposits are one of the major investment avenues for middle class taxpayers. Being backed by the RBI (up to Rs.1 lakh), Bank Fixed Deposit is considered one of the safest investment option.
We all know that interest on fixed deposit is taxable on accrual basis i.e. even if the fixed deposit is not matured at the year end, interest credited to the account shall be added to the total income and should be shown in the ITR but many taxpayers tends to forget it.
There is also a misconception that bank fixed deposit is an eligible deduction under section 80C but it?s not true. Only a fixed deposit having tenure of 5 years is eligible for tax benefits u/s 80C, all the other FDs are not tax saving and thus no deduction of the amount converted into FD is allowed.
Although bank deducts TDS at the rate of 10% on the interest amount but if the interest on fixed deposit is less than Rs.10,000 than banks is not entitled to deduct TDS and the onus of paying taxes is on the investor. Further, if the investor falls in the tax bracket of 20% or 30% and bank deducts TDS @ 10% on the interest, in that case also he is required to add the interest income in the total income and pay the tax over and above 10%.
3. Recurring Deposit Interest
Similar to Fixed Deposit, interest on recurring deposits are also taxable on the accrual basis. You deposit some amount each month for a fixed tenure and get interest on the deposited amount. This interest amount is taxable in the hands of the depositor.
Prior to Budget 2015, TDS was not applicable on the interest earned on the recurring deposits but w.e.f. 1st June, 2015, interest, if exceeds the threshold limit of Rs.10,000, shall be subject to TDS @ 10%.
Relaxation of the applicability of TDS is given in case of recurring deposit scheme offered by Post-Offices. This means no TDS (even if interest exceeds Rs.10,000) shall be deducted in case of recurring deposit account is in post-office.
In case of recurring deposit account is in bank, the interest earned is treated same as in fixed deposits and bears the same tax treatment.
4. Savings Account Interest
Yet another interest income which is to be included in the total income while calculating the tax liability but taxpayers tend to forget the same. Savings Account Interest is also taxable but under section 80TTA, there is a relaxation on the taxability on the interest amount up to Rs.10,000 i.e. if the yearly interest credited in the savings account is less than Rs.10,000 than interest shall be totally tax-free but if it exceeds Rs.10,000 then the interest over and above the threshold limit of Rs.10,000 becomes taxable.
The deduction of Rs.10,000 u/s 80TTA is? not bank or branch wise limit. You are required to summate interest from all the banks and add it into the total income and get tax deduction benefit of Rs.10,000.
Further, No TDS will be deducted from the interest on savings account either by the bank or post office which left taxpayer to calculate and pay tax as per his tax slab.
5. Gift worth Rs.50,000 or above
Tax Laws does not barred you from receiving gifts but put a limit of which you can receive gift without paying any tax. Yes, receiving gifts can also be taxable.
As per current tax laws, an individual can receives gift in cash or kind up to Rs.50,000 from person other than blood relatives without paying any taxes. If gift exceeds Rs.50,000 than whole of such received gift shall be deemed as income of the individual and becomes taxable.
Not all gifts are taxable; there are few instances where gifts of any amount are tax-free:
- Received on your Marriage
- Received by the way of Will or Inheritance
- Received from Local Authority (state and related organizations)
- Received from Charitable Institutions, Hospitals, Educational Institutions, University and other institutions referred u/s 10(23).
- Received in contemplation of death of the payer
- Received from Blood Relative
In case of movable or immovable property, the fair market value shall be considered to ascertain the taxability.
Further, any gifts given to the spouse, minor child and daughter-in-law for inadequate consideration shall be construed as income in the hands of the individual making the gift.
6. Pin Money to Wife/Homemaker
Most of the women in India are still dependent on their husband for their day-to-day expenses. The money given by the husband per month for household expense is the only financial aid to them. Still most of them manage to save money to buy gold, invest in shares and make investments like RD or FD etc.
Clubbing provision of Income Tax Act does not apply on the income from the investment made out the pin money. Thus ITR is to be required to file in the name of the homemaker but only few of them file ITR, which results into creation of black money.
In addition to the income tax, if the pin money is used for buying gold than the value of the gold must be included while calculating the threshold limit of Rs.30 lakhs of wealth tax.
7. Minor Child Income
In Indian Tradition, elderly people give gifts worth thousands on the birthday of child which could be in cash or kind like gold chains etc. If the gifts received exceeds the threshold limit of Rs.50,000 than it evokes the clubbing provision and the gift needs to be included in the income of the parent whose total income is higher before including the income of the minor.
Further, if you invest in the name of the child like in shares, Fixed Deposits, KVP, NSC etc. than you have to pay taxes on the income earned on the investment and you can claim a meager deduction of Rs.1,500 as deduction from the total income.
However, if the child earns income from his/her own skills, experience than the clubbing provision remains silent and he/she is required to file ITR in his/her own name.
Other Incomes like Proceeds from life insurance etc.
Apart from the above mentioned points, there are few other receipts which taxpayers tend to neglect because of its unusual nature. One of such receipts is proceeds from life insurance. In case the premium paid towards life insurance exceeds 10% of the sum assured than the proceeds of the life insurance policy becomes taxable. Further, the money received from the life insurance company on the death of the physically disabled person, shall be taxable in the hands of the proposer.