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Personal Finance

Top 5 mistakes when filing Income Tax Returns and How to avoid them

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This is a guest post by Anjesh Bharatiya. He is a taxman by profession and a Chemical Engineer by education. He has been an investor in the stock market since he was 15 years old. He likes to write about personal finance, stock markets, government policies, taxation, philosophy and football


Introduction:

It’s March. Tax-filing season will soon be upon us. And with the recent move in the Budget 2020 of introducing a no-exemption tax regime in addition to the existing one, there is bound to be some confusion in the mind of the average taxpayer. However, the changes introduced in the Budget will not be effective for the Assessment Year (AY) 2020-21 income tax returns (ITRs) that are to be filed from April onwards. The AY 2020-21 pertains to the income earned by you in the Financial Year 2019-20. A lot of people tend to do their own tax planning and return filing. If you are not using the services of a certified professional or the myriad tax filing services being offered online, there are chances some seemingly innocuous mistakes may creep in while filing your returns and may lead to headaches in the form of income tax notices or tax demands down the line. In this article, we will look at some of the common mistakes people make while filing their ITRs.

We also wrote about another frequently asked question, The best Tax-Saving ELSS Fund

The top 5 mistakes when filing IT Returns and how to avoid them

1. Choosing the wrong ITR form:

The list of ITR forms & utilities for various AYs are hosted at this link:

https://www.incometaxindiaefiling.gov.in/downloads/incomeTaxReturnUtilities?lang=eng 

It is very important to choose the correct AY and the ITR form which is relevant to you. Next to the name of each form in the link, the description of the eligibility criteria for the form is also given. Carefully read the descriptions and select the form which is applicable to you. For a salaried taxpayer, usually ITR-1 or ITR-2 form is to be selected. If you have profit/loss from capital gains in the year, choose ITR-2. For professionals & businessmen, ITR-3 is the form to be selected unless you are utilizing the presumptive taxation scheme (a flat rate taxation scheme under sections 44AD, 44ADA or 44AE) in which case ITR-4 would be the correct form. 

How to avoid this:

Top 5 mistakes when filing Income Tax Returns and How to avoid them

Click to enlarge

Use the checklist below to find out which ITR form is applicable to you:

Further, taxpayers having income from sources outside India or holding assets outside India or those having brought forward losses or wanting to carry forward losses of the current year also cannot use forms ITR-1 & ITR-4.

2. Failing to report income under all heads:

Usually a salaried taxpayer may also be earning some interest on Fixed Deposits or may have made capital gains on debt/equity instruments. You may also be earning interest from investments made in the name of your spouse or minor children from your own funds. Thus, it is very important that income under all heads be reported correctly in the ITR. This includes interest income, capital gains, rental income etc. This is especially true for interest income on which tax is deducted at source (TDS). If such income is not reflected in the ITR filed, be prepared to receive an income tax notice under section 143(1)(a). This notice is issued seeking a response to the errors/ incorrect claims/ inconsistencies in your return which attract adjustments. This is the type of proposed adjustment you may find in such a notice if you fail to reflect the interest income correctly in the ITR:

Top 5 mistakes when filing Income Tax Returns and How to avoid them

You may respond to the notice and post your disagreement (if any) with the proposed adjustment within 30 days of the receipt of this notice. 

It is always advisable to check your tax credit statement (Form 26AS) before filing the return to ensure that any income reflecting in this form is correctly reflected in the ITR to be filed. Even exempt income like dividends earned from stocks, agriculture income and savings interest (exempt up to Rs 10,000/- under Section 80TTA) should be reflected in the ITR as a matter of prudence.

Apart from this, if a taxpayer has two houses in his name, only one of the houses can be claimed to be ‘self-occupied’ and the taxpayer has to include the income from the second house under the head ‘Income from House Property’. Even if the second house is unoccupied, potential rent from the same (annual value) is taxable after subtracting municipal taxes, standard deduction (30% of Net Annual Value i.e. Annual Value minus municipal & other taxes) and interest on housing loan, if any.

How to avoid this:

Before filing the return, a taxpayer should prepare a list of income under all heads i.e. Salary, Capital Gains, House Property, Business Income, Other Sources and Exempt Income. Care should be taken that no income is missed and the amount is also correct for each head.

3. Claiming deductions under the wrong sections:

There are several deductions available to a taxpayer and the eligible amounts keeps on changing from time to time. Most of these deductions are housed under Section 80 of the Income Tax Act. The common deductions claimed by taxpayers are under Section 80C (certain investments), 80CCD (contribution to pension fund), 80TTA (savings interest up to Rs 10,000/-), 80TTB (interest income of up to Rs 50,000/- for senior citizens), 80E (interest on education loan), 80D (health insurance premium) and 80G (donations to eligible organizations). In case of salaried employees, the employer usually seeks proof of deductions claimed so that correct tax can be deducted on the salary payments. However, since the ITR is filed by the taxpayer himself, it’s his/her responsibility that claims of all deductions are backed by adequate evidence. Another thing to remember in case of claiming deduction under section 80G for donations made is to ascertain whether exemption is 100% of the amount paid or only 50%. From time to time, the Income Tax Department carries out verification of ITRs to eliminate fraudulent refund claims (https://timesofindia.indiatimes.com/city/hyderabad/i-t-department-busts-refund-scam-200-techies-return-tax-amount/articleshow/60849530.cms). Even if you are eligible for certain deductions, not having evidence for the same at the time of verification can land you in hot water. So do keep the proof of deductions handy for any future requirements.

How to avoid this:

It is very important that deductions are claimed only if one is eligible for them and under the correct sections. The details of the common eligible deductions available have been discussed above. However, in case of any doubt, it is always better to do some research instead of playing it by the ear.

4. Not reconciling your income & tax deduction with Form 26AS:

Form 26AS is your tax credit statement and can be downloaded from your e-filing account on the Income Tax website. Before filing of return, it is extremely important to reconcile your income with that reflected in the Form 26AS. Sometimes, you may have received bonus, arrear payments or interest income which you may skipped reflecting in your ITR. You may have even switched jobs during the year and thus, would have received salary from two employers. All these incomes will appear in your Form 26AS as well as the Form 16/16A issued to you by the employer/deductor. Another thing to verify is whether the tax deducted by your employer (as well as other deductors) is being properly reflected in the Form 26AS. If there is any discrepancy, take it up with your employer at the earliest so that they can check the issue and revise their TDS returns, if required. 

How to avoid this:

Do not blindly rely on the Form 16/16A issued by the deductor. Unless the tax deducted is visible in the Form 26AS, the credit for the taxes paid will not be allowed to the taxpayer while processing the return resulting in a tax demand. Also. A taxpayer should not accept a manually prepared Form 16/16A and should insist on Form 16/16A generated by the deductor on the Income Tax Department’s “TRACES” portal since it is already reconciled with the Form 26AS.

 5. Not mentioning all bank accounts:

All bank accounts held by you during the year are to be reflected in the ITR filed along with the correct IFSC code. Even if some accounts do not have much balance or transactions, it is important to be forthright and not conceal anything in your ITR. Apart from this, if you have claimed refund in the ITR filed, then make sure your PAN is linked with the bank account in which you want to receive the refund and it is pre-validated on the e-filing website. The bank account can be pre-validated in your Profile Settings as seen below:

Top 5 mistakes when filing Income Tax Returns and How to avoid them

How to avoid this:

Prepare an inventory of all bank accounts maintained by you during any part of the current year. It is also advisable to maintain a limited number of bank accounts and to close any rarely used/dormant bank accounts.

After all of it is done, another frequent and avoidable mistake is not e-verify the ITR filed.

Not e-verifying the ITR filed:

Once your ITR is filed, you are required to e-verify the same through Aadhaar based OTP or netbanking or bank account or demat account or bank ATM. If you fail to e-verify the ITR within 120 days, it will be invalidated. If you choose not to avail the option of e-verification, you can also manually dispatch a signed copy of the ITR acknowledgment receipt (ITR-V) to CPC (Centralized Processing Centre) Bangalore so as to reach them within 120 days of your return filing date. 

How to avoid this:

Remember to verify the return once it is submitted. Once your ITR is verified, you will receive an e-mail certifying the same. Even in cases where the acknowledgment was sent manually, the Income Tax Department notifies you when the acknowledgment is received by them. 

Final Word

ITR filing is a simple yet intricate exercise. Apart from ITR-1 & ITR-4 forms, the other forms are quite detailed and lengthy. Thus, it is vital that extreme care is taken while filing the ITR to avoid any mistakes and omissions. And if an error somehow does creep in, you should immediately revise the ITR within the prescribed time. A taxpayer has time till the completion of the relevant assessment year to rectify the mistake. For AY 2019-20, March 31, 2020 is the last date to revise your returns. Some information like personal details, taxes paid and bank account details are already pre-filled in the ITR forms based on the data available and your previous returns. The Income Tax Department will soon be expanding the scope of pre-filled details in ITR forms to include details of dividend from mutual funds, profit/loss from equity investments etc. to make it easier for you to file your returns. Of course, if the entire return filing process seems too cumbersome or time consuming to you, you can always take the services of tax professionals and reputed online portals.

Here’s wishing everyone a stress-free tax return filing season.