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.
Filing an ITR is mandatory if your gross total income exceeds the basic exemption limit — ₹4 lakh under the new tax regime (the default) or ₹2.5 lakh under the old tax regime. Under the new regime, income up to ₹12 lakh is completely tax-free due to the Section 87A rebate, but zero tax payable does not mean zero obligation to file
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 deduct TDS on interest earned, but you remain liable to pay additional tax if your total tax liability exceeds the TDS already deducted. Under the old tax regime, savings account interest up to ₹10,000 per year is deductible under Section 80TTA; senior citizens can claim up to ₹50,000 on all deposit interest under Section 80TTB. These deductions under 80TTA and 80TTB are not available under the new tax regime. Interest from PPF and Sukanya Samriddhi Yojana remains fully tax-free under both regimes.
Monetary Gifts are not Taxable
Gifts received in the form of money are often assumed to be tax-free. India does not have a separate Gift Tax Act. Monetary gifts are taxed under Section 56(2)(x) of the Income Tax Act as “income from other sources.” Gifts exceeding ₹50,000 in a financial year received from non-relatives are fully taxable at the applicable slab rate. Failing to report taxable gifts in your ITR can result in penalties and scrutiny. Gifts received from specified relatives (parents, spouse, siblings, etc.), on the occasion of marriage, through a will, or by way of inheritance are exempt regardless of amount.
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 provide HRA, you may be eligible to claim a deduction for rent paid under Section 80GG — but only if you opt for the old tax regime. A maximum deduction of ₹60,000 per year can be claimed under Section 80GG under the old tax regime only. Section 80GG deduction is not available under the new tax regime. To claim under Section 80GG under the old regime, you must meet all of the following conditions
- Have filed a declaration as per Form 10BA
- Not be receiving HRA from your employer
- Not own a home in the city where you work or carry out business
- Not be a member of HUF owning a property valued under 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.
These home loan tax benefits are available only under the old tax regime. Under the new tax regime for FY 2025-26, home loan deductions for interest under Section 24(b) and principal under Section 80C are not allowed for self-occupied properties. Specifically:
- Principal repayment: Deductible up to ₹1.5 lakh under Section 80C — old regime only.
- Interest on self-occupied property: Deductible up to ₹2 lakh per year under Section 24(b) — old regime only.
- Interest on let-out (rented) property: The full interest paid on a home loan for a property you rent out can be claimed as a deduction under Section 24(b) against income from house property, with no upper cap — and this is available under both regimes. CharteredHelp
- Taxpayers with significant home loan interest payments should carefully compare both regimes before filing.
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.
