How to deal with Income Tax Notices in India

Updated: Feb 2, 2019

Not many of us know that when we buy flat or any other immoveable property, we require deducting tax at 1% from the purchase price and paying to government. Another mistake we make by not disclosing the income generated through the investments in the name of spouse or children.

These small mistakes get small taxpayers in the list of tax department and they may be served with tax notices. However, all tax notices should not be a reason of worry, only few notices like scrutiny etc. shall be handled very carefully. But what are the reason for which one would get income tax notices and how to deal with these tax notices? Let?s us start with reasons.

13 Unlucky Reasons for getting Income Tax Notices

Reasons for getting Income Tax Notices

1 Not Reporting/Hiding Interest Income

The First and foremost mistake that most of the taxpayers tend to make is forgetting to mention the interest income from bank savings account, fixed deposits and recurring deposits. All the interest earned from banks are taxable even interest from tax savings fixed deposits are taxable.

However, Section 80TTA provides tax exemption up to Rs.10,000 on interest from savings account. Most of get confused here, that section 80TTA provides Rs.10,000 exemption on all types of interest but it just provides benefit on savings account neither on fixed deposit nor on recurring deposits.

One more misconception taxpayer has that once the bank deduct TDS than there is no need to pay any taxes on the interest amount but this applies for the taxpayers falls under the tax bracket of 10% because TDS rate on interest is 10%. If you falls in upper tax bracket of 20% or 30% than you are required to pay remaining tax liability under self-assessment tax.

Till last year, TDS was required to be deducted if the interest received from one bank branch exceeded Rs.10,000 in a financial year but government has tweaked this rule and now interest calculation for TDS is done bank wise not branch wise. So if you deposit Rs.1 lakh each fetching interest at 10% in two branches of SBI bank than you are liable for TDS deduction under new rules. What?s more embracing is Recurring Deposits have also been included under the ambit of TDS.

Remember to give Form 15G or Form 15H if your tax-liability for the year comes to zero and avoid deduction of TDS. Also update your PAN number to your bank to get TDS deducted at prescribed rate of 10% not at a penalized rate of 20%.

2. Ignoring/Forgetting Income of Old Job

Got better opportunity and switched job this year? If this is your case than you must not forget to take form 16 and report your income from your previous employer. This is because your new employer does not take your past income into account and deduct TDS taking basic exemption limit of Rs.2.5 lakhs. This foul practice doubles the basic exemption limit and reduces the tax outgo which can easily be traced by tax department when you file your income tax return.

For example, you worked with your past employer for 5 months drawn salary of Rs.50,000 per month and after than you joined new employer at salary of Rs.60,000 per month. If you don?t disclose your past income to your new employer than he will deduct tax only on Rs.1.70 lakh (Rs.4.20 lakh ? Rs.2.50 lakh) which is less than half of tax which should have been deducted.

Do remember to disclose all your past incomes, investments and any deductions at the time of joining new employer.

3. Not Filing of Income Tax Returns at All

As per income tax law if your gross income (prior to deductions) exceeds the basic exemption limit of Rs.2.50 lakhs in case of individual below 60 years, Rs.3 lakh for senior citizen between 60 years to 80 years and 5 lakhs for super senior citizen i.e. above 80 years of age, than it is mandatory to file income tax return. Also, it does not matter whether your employer deducts TDS and your tax-liability after TDS comes to zero, tax return is to be filed. For example, your annual salary is Rs.4.50 lakhs and you invest Rs.1.50 lakh under section 80C, than tax liability comes to zero but you are required to file tax return as your gross income exceeds Rs.2.50 lakhs.

Lot of people think that salaried individuals with an income up to Rs.5 lakhs a year are exempted from filing tax return and their form 16 is treated as tax return but this rule has been long withdrawn and they are also required to file tax return on time to avoid any tax notices.

4. Tax Benefit on house Sold before 5 years

Section 80C offers a deduction of repayment of home loan in case loan is taken for acquiring or renovating the house but if the house is sold within 5 years from the date of acquisition than the benefit availed by the taxpayer shall be reversed and he is required to pay tax on the same. However, benefit taken on the interest on home loan under section 24 is not reversed and taxed.

Suppose you have bought a house by taking home loan of Rs.10 lakhs with EMI of Rs.10,000 for 20 years in 2013-14 but have sold it in 2016 than you will have to add the principal repayment amount for 2013-14 and 2014-15 under income from other sources and pay tax accordingly. Remember reversal of only repayment is to be added not interest part.

5. Insurance Policy discontinued before 3 years

Similar to home loan, if insurance policy taken and discontinued within 3 years from the year of taking policy than the deductions availed in the past years have to be reversed and taxed. However, not many of us know this rule but this applies on life as well as health insurance.

Read: Life Insurance and Health Insurance Policy Taxation Benefits

6. Misusing forms 15G, 15H to avoid TDS

Form 15G or Form 15H is used to intimation to the payer to not deduct tax on the income since your total tax liability for the financial year comes to zero. Form 15G is used by individual up to the age of 60 years and can only be used if the total taxable income of the taxpayer is below basic exemption limit of Rs.2.50 lakhs and also his total interest income for the year should not exceed the basic exemption limit of Rs.2.50 lakhs. On the other hand Form 15H is to be filled by individuals above 60 years and having total taxable income below basic exemption limit of Rs.2.50 lakhs.

Read: Avoid Tax by filing Form 15G or Form 15H Online

7. Not deducting TDS when buying property

Last year, Government has extended the scope of TDS by including real- estate transactions under its ambit. If you buy house exceeds Rs.50 lakhs than you have to deduct TDS at 1% from the sale price and deposit it with the Government and in case of the seller is an NRI, the rate of TDS is as high as 30%. This amount should be deposited with the Government by 7th of the following month under Form 26QQB.

Buyer must consider the sale price not the circle rate for deducting that means if the circle rate is Rs.55 lakh the property gets sold for less than Rs.50 lakh than no TDS is to be deducted. Further, if buyer opts to pay the money by EMI than the buyer is required to deduct TDS on each EMI.

One calculation mistake which most of the buyers make while deducting TDS is that they deduct TDS on the amount exceeding Rs.50 lakh, not on the whole amount while the rule says that if the property value exceeds Rs.50 lakhs than TDS is to be deducted on total amount not just on the amount exceeding Rs.50 lakh and this non-deduction or wrong deduction would lead to penalty of Rs.1 lakh.

8. Disregarding Clubbing Provisions

It?s a common practice to invest in the name of the non-working spouse or minor children. But these investments are treated as gifts and are not taxable in the hands of the receiver however, if these gifts generate any income than the income needs to be clubbed and taxed accordingly. Suppose, you bought a house in your spouse name than any rental income or capital gains should be clubbed with your income and taxed.

In the case investment is made in the name of the minor child than the income is clubbed with the parent whose earning is higher. A small deduction of Rs.1,500 can be claimed per child per year up to a maximum of two child under section 64.

Read: Sukanya Samriddhi Account to be clubbed but tax-free

9.?Not Reporting Tax-Free income

Tax-Free incomes includes interest income from PPF, Tax-Free Bonds, dividends, capital gains from equity shares and gifts from certain relatives. Though these are not taxable incomes but you need to disclose these incomes in your ITR as Tax-Free Incomes. However, one may not receive income tax notices for not mentioning tax free incomes in ITR but it may create inconsistency in your returns.

A new rule regarding taxation on dividend has been added through the Financial Bill 2016 wherein a tax has to be paid on the dividend income if it exceeds Rs.10 lakh in a year. This rules especially inserted to curb the HNIs practice of dividend stripping to earn tax free incomes.

Read: Best Tax-Free Investments Options in India

10. Spending, investing beyond means

Like Shopping or going on vacations frequently? But if your expenditure exceeds your income or your cash withdrawals exceeds certain limits than your credit card company or your bank is supposed to report this to tax department and you may be served with income tax notices for knowing the source of this overspending.

If your cash withdrawals including ATM transactions exceeds Rs.50 lakh a year or your gold purchase increases Rs.2 lakh or if your buy bonds worth Rs.5 lakh or if you buy shares worth Rs.1 lakh or invest more than Rs.2 lakh in mutual fund scheme than you become high-value investor and your broker supposed to report that to income tax department.

If these purchases do not match with your reported income in ITR than you may get income tax notices.

11. Mismatch in tax credit

In case you have got TDS cut from your income but while filing ITR your tax paid figure do not match with your tax credit statement (Form 26AS), than you may be served with Income Tax Notices. Do remember to cross verify the tax credit statement before filing ITR. There are chances that while depositing TDS data your employer could have quoted wrong PAN or have not submitted data at all. So do check Form 26AS regularly to escape any rush at the last minute.

Read: Tax Rebate increased to Rs.5,000 u/s 87A

12. Inadvertent/willful non-disclosure of income

What if you made gains by trading in share market or renting a vacant house or by earning online but did not report in your ITR intentionally? With advent to improved tracking your concealment will gradually be traced and may result in hefty repercussions and penalties.

For instance, if you have rental income of Rs.15,000 per month but neither did you pay tax nor you disclosed it in ITR, than you may have to pay 300 percent of your tax evasion i.e. Rs.54,000 for evading tax of Rs.18,000 (assuming you fall in 10% tax bracket).

13. Defective income tax return

You may have made some calculation error or some apparent error than you may be asked to file rectified return by serving you a tax notice.

How to Deal with such Income Tax Notices?

Do not panic on receiving income tax notices, it might be just a tax demand or for non-filing of income tax return which can simply be solved.

Read: How to Check your Tax Refund Status Online?

Do follow the steps given below before proceeding:

  1. Never ignore any tax notices from income tax department. It might lead to serious penalty or rigorous imprisonment.
  2. Go through the tax notices thoroughly, check the validity of the notice, understand the reason and gather the documents it asked for reply of the notice.
  3. If it is for tax demand, pay the amount together with interest and penalty. If the notice is for mismatching of Tax Credit than do it simply as you have filed the original tax return.
  4. When you ask for refund in ITR, the tax department usually set-off the refund against any tax demand pending for earlier years. But this adjustment is made after giving you time period of 30 days through the tax notices. If you are satisfied with the notice than do nothing but if you have found no outstanding demand than you should reply with the reasons asking department for not adjusting the refund against demand.

Tax notices for scrutiny or reassessment should be the reason to worry and you must take help of the qualified professional preferably Chartered Accountant.

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