Filing income tax returns can be a daunting task for many individuals. With complex regulations and ever-changing laws, it is easy to fall prey to common myths and misconceptions that could cost you money.
Anybody who earns an annual income above ₹7lakh must file tax returns. However, there are several myths associated with filing income tax returns. Here are nine common myths that may cost you if you are not careful:
9 Income Tax Myths You Should Never Believe to Save Money When Filing Returns
Asking everyone in your life how they intend to handle money received and money owed on their next tax return is only natural when you’re feeling overloaded with tax questions regarding your home office expenses, bitcoin investments, side hustle revenue, and more. But be careful, it is possible that the advice you get is more fiction than fact.
E-filing Tax Returns are not Mandatory
One of the most prevalent misconceptions is that e-filing tax returns are not mandatory. However, this is not true. The electronic filing of tax returns has become mandatory for most taxpayers. E-filing offers convenience, faster processing, and reduces the chances of errors. Failing to e-file when it is required may result in penalties and unnecessary delays.
One Need Not Disclose the Previous Salary to the Current Employee
Some individuals believe that they do not need to disclose their previous salary details to their current employer. However, in some jurisdictions, employers are required to report the previous salary of employees, especially for tax purposes.
If you switch jobs during the financial year without disclosing the previous salary, the new employer will deduct tax on current earnings. However, the tax liability is computed on total income during the year.
No Tax is Levied on Interest
Another common myth is that interest earned on bank deposits or investments is completely tax-free. While certain exemptions and deductions may apply, interest income is generally taxable. It is crucial to report all interest income accurately in your tax returns to avoid penalties or legal issues.
Your bank may levy Tax Deducted at Source (TDS). However, you may still be liable to pay tax on interest earned via fixed accounts, recurring accounts, and savings accounts based on your tax slab.
Monetary Gifts are not Taxable
Gifts received in the form of money are often assumed to be tax-free. Large monetary gifts can be subject to gift tax, and failing to report them can result in penalties or additional taxes owed. It is essential to familiarize yourself with the gift tax laws in your country and report any applicable gifts accurately.
Monetary gifts received from family at your wedding, charitable organizations, and inheritances are not taxable. All other monetary gifts exceeding ₹50,000 are taxable.
No Deduction on House Rent Allowance (HRA) if it is not paid by Your Employer
Employees who live in rented accommodations and receive a House Rent Allowance (HRA) often assume that they cannot claim deductions if their employer does not provide HRA. However, taxpayers can claim deductions for rent paid, even if HRA is not provided by the employer. It is essential to explore the tax laws in India and claim eligible deductions to minimize your tax liability.
Even if your employer does not pay HRA, you are eligible to claim a deduction. The same is available under section 80GG if you:
- Have filed a declaration as per Form 10BA
- Claim exemption under section 10(13A) when an employer does not pay HRA
- Do not own a home in the location where you partake in business activities or where you are a member of HUF (Hindu Undivided Family)
- Are not a homeowner of a property that has been valued as per sections 23(4) (a) and 23 (2) (a)
Tax Deduction is not Available on Home Loan Repayment
Contrary to popular belief, home loan repayments can offer tax benefits in many countries. Interest paid on home loans and principal repayments may be eligible for deductions or exemptions, subject to certain conditions. It is advisable to consult a tax professional or refer to the tax laws in your country to determine the deductions you can claim for home loan repayments.
Deduction under section 80C of the Income Tax Act, 1961 provides income tax deduction on principal repayment of the home loan up to ₹1.5lakh. Additionally, you may claim benefits for the interest payment for self-occupied and leased property.
Mentioning a Single Bank Account is Sufficient
Some taxpayers mistakenly believe that mentioning only one bank account in their tax returns is sufficient. However, it is crucial to accurately report all bank accounts held by you during the tax year. Many tax authorities require taxpayers to disclose details of all their financial accounts, including bank accounts, to prevent tax evasion. It is important for you to provide details of all the bank accounts that you hold to ensure the refund is received in the correct account.
Once You File Online Tax Returns, the Procedure is Complete
Filing tax returns online is undoubtedly convenient and efficient. However, it does not mean that your tax-filing process is complete once you hit the submit button. It is essential to keep track of your tax return status, respond to any notices or requests from tax authorities promptly, and ensure all necessary documents are submitted. Neglecting these steps may lead to audits, penalties, or further legal complications.
You also need to e-verify the returns using your Aadhar number or send a copy of the acknowledgment to the Central Processing Center in Bengaluru.
Electronic Filing Results in Audits
Many taxpayers fear that electronically filing their tax returns increases the chances of being audited. However, the method of filing, whether electronic or paper-based, does not determine the likelihood of an audit. Tax authorities select audit targets based on various factors, such as income levels, deductions claimed, and other red flags. Filing your taxes accurately and honestly, regardless of the filing method, is the best way to avoid audits.
Wrapping Up
Understanding the facts and dispelling common myths about income tax is crucial to ensure a smooth and compliant tax filing process. Falling for these misconceptions can lead to financial losses, penalties, and unnecessary audits. It is advisable to consult a tax professional or refer to the tax laws applicable in your country to maximize your tax benefits while staying compliant with the regulations.
Key takeaways
- One of the most prevalent misconceptions is that e-filing tax returns are not mandatory.
- Another common myth is that interest earned on bank deposits or investments is completely tax-free.
- Gifts received in the form of money are often assumed to be tax-free.
- Employees who live in rented accommodations and receive a House Rent Allowance (HRA) often assume that they cannot claim deductions if their employer does not provide HRA.
