Receiving an Income Tax Notice from your Assessing Officer, is perhaps one of the scariest things ever.
This fear arises, primarily from two reasons (a) you have evaded tax and (b) you are ignorant or lazy about the tax laws.
While you address the first issue, let me the talk about the second one.
Some of the common reasons, that could invite an Income Tax notice, are enumerated below.
1. When you do not file your Income Tax Returns
I had covered this aspect, in detail, a few weeks back in my blog post Do I have to file income tax returns?.
As discussed, it is mandatory for you to file your returns when your "gross taxable income" is more the basic tax exemption limit.
Even if you have a 'nil' tax liability or you have already paid your taxes, it does not exempt you from filing your returns.
Therefore, non-filing of income tax returns could be one reason why you may receive an Income Tax Notice.
2. When you delay filing your returns
Normally, July 31st is the last date for filing your income tax returns for the previous financial year. This year, of course, due to the protests against the draconian Return Forms initially circulated, the last date has been extended to Aug 31st.
So, you still have time to file your returns. Moreover, things have been made pretty simple and straightforward. In fact, the entire return-filing process can be completed online, from the comfort of your home.
There is simply no excuse for you to not complete this formality. If you fail, you can well expect the Income Tax Notice.
3. When you don't include the previous employer's income
Job changes have become frequent these days. Therefore, earning salary income from two (maybe even more) employers in a given financial year, is not uncommon.
Based on the Form 16 received from their current employer, many people include only this salary in their Income Tax Returns. Either inadvertently or due to sheer laziness, they don't follow-up for the earlier Form 16 from their previous employer(s). Consequently, they fail to declare the salary earned at their earlier jobs during the year.
This is a clear case of under-reporting your income. So don't be surprised, if your Assessing Officer issues you an Income Tax Notice.
4. When you don't declare your Savings Account interest
Most of you are aware that the Savings Account interest is tax free up to a sum of Rs.10,000.
However, this does not mean that you can exclude this amount from your returns.
No. You have to add the Savings Account interest to your total taxable income. Thereafter, you can show the same amount (subject to a maximum of Rs.10,000) as deduction u/s TTA.
A notice can be expected if you don't disclose your Savings Account interest.
5. When you fail to disclose interest earned on FDs, RDs and Post Office Schemes
As I have often warned you in the past, every single rupee of ALL your Fixed Deposits, Post Office Schemes (except PPF) and Recurring Deposits is liable for tax.
Thus, you must add up all the interest earned during the year and show it as 'Income from other sources'. Even though PPF interest is not taxable, it has to be shown as 'Exempt income' in the Return Form.
In earlier years, it may have been easy to escape from the clutches of taxman. However, computerization in the recent years has made it very easy for tax authorities to catch any deposits not disclosed and evaded from tax.
Again, the income tax notice is definitely due.
6. When you misuse Form 15G / 15H
To avoid TDS (Tax Deduction at Source), people sometimes give false declaration under Form 15G / 15H.
Based on their total income, they are liable to pay tax on their interest income. So their fixed deposits should ideally be subject to the provisions of TDS.
The idea of TDS is to pay at least some portion of your tax liability as you keep earning income during the year. That is why TDS is also deducted every month on your salary income.
Even though people may square off all their tax liabilities at the year-end, this deferring of tax is violation of law... and hence a reason for Income Tax Notice.
7. When your income and expenses / investments don't match
As you are aware, most financial transactions are nowadays computerized. Further, most of these require your PAN details.
Therefore, it has become easy for the tax authorities to track your expenses, incomes and investments. If your expenses and investments are not in line with your income, your case is likely to be caught by the computer aided scrutiny system.
Accordingly, you can definitely expect a knock on the door from your Assessing Officer. You have to explain the discrepancy that your expenses / investments are not commensurate with your declared income.
Apart from the inconvenience involved when receiving the Income Tax Notice, such lapses also carry monetary penalty. And it has been well established by the courts, that ignorance of law is no excuse. So you would do well to be keep yourself fully updated of at least the day-to-day tax laws and follow them diligently.
This fear arises, primarily from two reasons (a) you have evaded tax and (b) you are ignorant or lazy about the tax laws.
While you address the first issue, let me the talk about the second one.
Some of the common reasons, that could invite an Income Tax notice, are enumerated below.
1. When you do not file your Income Tax Returns
I had covered this aspect, in detail, a few weeks back in my blog post Do I have to file income tax returns?.
As discussed, it is mandatory for you to file your returns when your "gross taxable income" is more the basic tax exemption limit.
Even if you have a 'nil' tax liability or you have already paid your taxes, it does not exempt you from filing your returns.
Therefore, non-filing of income tax returns could be one reason why you may receive an Income Tax Notice.
2. When you delay filing your returns
Normally, July 31st is the last date for filing your income tax returns for the previous financial year. This year, of course, due to the protests against the draconian Return Forms initially circulated, the last date has been extended to Aug 31st.
So, you still have time to file your returns. Moreover, things have been made pretty simple and straightforward. In fact, the entire return-filing process can be completed online, from the comfort of your home.
There is simply no excuse for you to not complete this formality. If you fail, you can well expect the Income Tax Notice.
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| Are you doing something wrong that could invite a Notice from Income Tax? |
3. When you don't include the previous employer's income
Job changes have become frequent these days. Therefore, earning salary income from two (maybe even more) employers in a given financial year, is not uncommon.
Based on the Form 16 received from their current employer, many people include only this salary in their Income Tax Returns. Either inadvertently or due to sheer laziness, they don't follow-up for the earlier Form 16 from their previous employer(s). Consequently, they fail to declare the salary earned at their earlier jobs during the year.
This is a clear case of under-reporting your income. So don't be surprised, if your Assessing Officer issues you an Income Tax Notice.
4. When you don't declare your Savings Account interest
Most of you are aware that the Savings Account interest is tax free up to a sum of Rs.10,000.
However, this does not mean that you can exclude this amount from your returns.
No. You have to add the Savings Account interest to your total taxable income. Thereafter, you can show the same amount (subject to a maximum of Rs.10,000) as deduction u/s TTA.
A notice can be expected if you don't disclose your Savings Account interest.
5. When you fail to disclose interest earned on FDs, RDs and Post Office Schemes
As I have often warned you in the past, every single rupee of ALL your Fixed Deposits, Post Office Schemes (except PPF) and Recurring Deposits is liable for tax.
Thus, you must add up all the interest earned during the year and show it as 'Income from other sources'. Even though PPF interest is not taxable, it has to be shown as 'Exempt income' in the Return Form.
In earlier years, it may have been easy to escape from the clutches of taxman. However, computerization in the recent years has made it very easy for tax authorities to catch any deposits not disclosed and evaded from tax.
Again, the income tax notice is definitely due.
6. When you misuse Form 15G / 15H
To avoid TDS (Tax Deduction at Source), people sometimes give false declaration under Form 15G / 15H.
Based on their total income, they are liable to pay tax on their interest income. So their fixed deposits should ideally be subject to the provisions of TDS.
The idea of TDS is to pay at least some portion of your tax liability as you keep earning income during the year. That is why TDS is also deducted every month on your salary income.
Even though people may square off all their tax liabilities at the year-end, this deferring of tax is violation of law... and hence a reason for Income Tax Notice.
7. When your income and expenses / investments don't match
As you are aware, most financial transactions are nowadays computerized. Further, most of these require your PAN details.
Therefore, it has become easy for the tax authorities to track your expenses, incomes and investments. If your expenses and investments are not in line with your income, your case is likely to be caught by the computer aided scrutiny system.
Accordingly, you can definitely expect a knock on the door from your Assessing Officer. You have to explain the discrepancy that your expenses / investments are not commensurate with your declared income.
Apart from the inconvenience involved when receiving the Income Tax Notice, such lapses also carry monetary penalty. And it has been well established by the courts, that ignorance of law is no excuse. So you would do well to be keep yourself fully updated of at least the day-to-day tax laws and follow them diligently.
