Myth Busting – Income Tax

August 7, 2021

With the tax filing season around the corner, there are many myths and assumptions amongst common men. In this article let’s debunk a few common myths and bust them.

Myth 1 – All investments are tax saving

Fact: ALL SIPs and Mutual Fund Investments available on popular applications like ET Money, Zerodha, grow, etc. are NOT tax saving

  1. Components of an investment: the expense i.e. the actual investment made; b. the income i.e. the interest/dividend earned out of the investment; and c. the profits i.e., the profit/gains on sale of the investment.
  2. Only the expense component of the investment can be claimed as a deduction U/s 80C against your total income earned in that year.
  3. Further, not all investments amount to this deduction under section 80C. Only SIPs or lumpsum contributions made in Equity Linked Savings Schemes, are eligible for deduction.
  4. Hence before you make your investment choices with an intent to save taxes, ensure that the investment actually amounts to tax saving.

Myth 2 – Entire HRA component of the salary is exempt

Fact: Most of the salaried category receive a component called House Rent Allowance as a part of their salary income. It is important to note that it is a TAXABLE ALLOWANCE & exemption can be claimed only to a certain extent.

  1. The rent paid by the individual can be claimed as an exemption against the allowance provided by the employer subject to certain conditions. Hence it is beneficial only to individuals paying rent.
  2. Exemption is limited to the LEAST of the following:
    1. Actual HRA received; or
    2. 50% of salary (Mumbai, Chennai, Delhi & Kolkata)/ 40% of salary (Other cities); or
    3. Actual Rent Paid less 10% of salary
  3. Most Corporates and MNCs have an income tax declaration portal, so ensure to declare your rent paid, if any, in the portal, which will impact your TDS deductions.

Myth 3 – Previous years IT returns can be filed at your disposal

Fact: When you decide to file your income tax return for the first time and wish to disclose your previous incomes, it is not possible on the face of the system.

  1. Return filing due dates are usually July 30 (Non Tax Audit Cases) and September 30th (Tax Audit Cases) of the year following the Financial Year (April 01, till March 31) in which the income arises, subject to extensions.
  2. If you have missed the due dates, then you can file the same by March 31st of that Assessment Year with penalty and interest as may be applicable.
  3. For Eg., For Financial Year 2020-21 the Assessment Year is 2021-22, hence the usual due date is July 31, 2021 (extended September 30, 2021), whereas the due date for filing returns with penalty and interest is March 31, 2022 (may or may not be extended to a further date owing to the pandemic). Hence if you are a first time return filer or if you have missed to file returns even by the due date for filing belated return, there is no option to file them except when the department itself calls for it by suspicion.

Myth 4 – No profits, no requirement to file return

Fact: Many sole proprietors or small entrepreneurs have an assumption that there is no requirement for them to file returns if they have incurred losses in the current year. This is a complete misconception.

  1. Return filing is a disclosure of income and when there are losses, there are requisite provisions in the Income Tax Act where the losses can be carried forward to the subsequent years.
  2. For you to adjust the losses incurred in the past against profits of the future years, the losses are to be reported the Government in the first place.
  3. Hence, irrespective of profit/ loss/ NIL income, be consistent in your track record as it is the most important criteria in many situations including application for loans.

Myth 5: All gifts are tax free

Fact: Not all gifts are taxable and not all gifts are tax free. Few illustrations of taxability of gifts are as given below:

Situation Taxability
Up to 50,000 Exempt
Above 50,000 whether individually or aggregate Entirely Taxable
Any amount (cash or kind) during wedding Exempt
Any amount (cash or kind) under will/inheritance Exempt
Any amount (cash or kind) from spouse, father, mother, brother and sister Exempt
Income generated through such gifts Taxable
Received property for inadequate consideration Difference between consideration and the stamp duty value – Taxable (if above 50,000)

Myth 6 – All Donations are 100% tax-free

Fact: Donation is a humanitarian aid, hence the department recognizes the charitable act and has provided for certain reliefs for such acts. But, there is a catch in the same, not all donations are 100% tax free and not all taxes are eligible for deductions. For eg. No deduction is available w.r.t donations made in cash in excess of Rs. 2,000/-. Donations made to PM Relief fund (including PM CARES) is 100% deductible whereas donation to Jawaharlal Nehru Memorial Fund is only 50% deductible.

Generally, donations are deductions allowed U/s 80G of the Income Tax Act. When you make donations to any charitable organizations, the donation receipt contains its PAN, registered address and eligible for deduction U/s 80G. Apart from these, there are various other donations made for scientific research purposes, for rural development, for family planning, etc are deductible under sections 80GG and 80GGA subject to certain limits and conditions.

Myth 7 – The process of return filing is complete with submitting the return

Fact: Return filing process does not end with just submitting the return in the Income Tax Portal.

It has to be verified in one of the following manners within 120 days from the date of filing of the return. If failed, the return will be treated invalid and will not be considered as filed.

  1. Adhaar OTP
  2. EVC via net banking
  3. EVC via bank account
  4. Through demat account
  5. Through ATM
  6. Sending physically signed copy of the ITR V to the Department

 

Myth 8 – I need not file my returns as my employer has already paid taxes on my behalf via TDS

Fact: Yes, your employer deducts TDS and remits it to the Department on your behalf, but by filing your return, you report it to the department by claiming that TDS in your return. Unless you file the return, the TDS remitted by your employer will not be set off against your personal tax liabilities.

Further, you will be treated as Assessee in default for not dispensing your responsibilities. Filing your return is also necessary as it is important to disclose whether you have any other income or not and also helps to get your refund, if there is any.

Hence return filing is necessary even if TDS is being remitted by your employer. The same is the case with respect to the other TDS deducted from your Fixed Deposit Interest/Savings Deposit Interest/Professional or Consultancy Income/Contractual Income/Cash withdrawal in excess of Rs. 1 crore, etc.

Myth 9 – Leave Travel Allowance (LTA) forming part of salary is always exempt

 

Fact: LTA is a TAXABLE ALLOWANCE if actual travel bills are not submitted to the employer and the same can be claimed only twice out of block period of 4 years

  1. Only actual travel costs can be claimed as exemption
  2. LTA can be claimed only for one trip in one calendar year
  3. Exemption can be availed only w.r.t travel within India
  4. Unclaimed LTA can be carried forward till the end of the block period

Myth 10 – Interest Income is entirely exempt

Fact: The taxability of interest income varies on a case-to-case basis.

  1. There are various sources of interest income like savings bank interest, fixed deposit interest, post office savings account interest, interest on savings accounts with co-operative banks.
  2. Out of the above, for Individuals below the age of 60 years and HUFs earning interest income from savings accounts with post office, banks or co-operative banks, such income is exempt upto Rs. 10,000 or the actual interest income whichever is lower (Section 80TTA).
  3. In case of Individuals above the age of 60 years, having interest income from Savings and Fixed Deposits, such income is exempt upto Rs. 50,000 or the actual interest income whichever is lower (Section 80TTB).
  4. Such exemptions are restricted only to Individuals (including proprietors) and HUFs and not extended for firms or companies.

Myth 11 – My CA or Tax Consultant is responsible for delayed refund

Fact: The Income Tax Department has its own mechanism of processing refunds which is totally out of control of the tax payers/Chartered Accountants/Tax Consultants or the public as a whole.

Once the return has been filed, it is with the department to process the return and issue the refund. This varies on a case-to-case basis. Hence this has nothing to do with the one who helps you in filing your returns.

It is to be noted that there might be various other reasons due to which the refund is delayed or not processed, such as incorrect bank details, name in the bank does not match with name as per PAN, joint account having another joint holders’ name as the primary account holder. However, the Assessee can always file a grievance with the department about the delay in the processing of refund, which will be addressed.

 

To conclude, Income tax being an ocean, one has to try to understand the provisions holistically and use them efficiently to obtain maximum benefits as well as to avoid unnecessary defaults. The above stated myths are very common amongst the salaried category and small and budding entrepreneurs figuring out the whole concept of taxation, how to save tax and how to pay the right tax.

 

Happy tax filing!

Disclaimer – The above list is only illustrative & not exhaustive.