Misconceptions and Myths about Income Tax.
There’s a funny saying about income tax which goes like this “death comes once but income tax comes every year in a person’s life” and someone else has said that death and income taxes are inevitable. All assesses are liable to pay tax and they do a lot of work planning and investing keeping tax in mind. All of them will have read the income tax act passed in the assembly that particular year but there is every chance of them having misunderstood some of the concepts. They will have discussed with some of their friends, colleagues, relatives who would have made them more confused. Today we will be discussing some of common misconceptions and the reality.
Process of Filing Income Tax
The process of filing income tax is difficult and cumbersome; most of the assessees (Tax Payers) have this misconception and especially those who have recently started paying income tax and those who do not have a proper knowledge about it. Government has made reforms and taken many steps so as to make the calculation of income tax easy and understandable for every individual. For example it has recently started online filing of income tax so as to help tax payers. Once the payer files income tax online he has to manually submit the acknowledgment to authorities and if he is having a digital signature the whole process of filing income tax will be easier.
Government has also made and prescribed different forms for filing. For example
- ITR 1 is for Individuals having Income from Salary/ Pension/ family pension & Interest
- ITR 2 is for Individuals and HUFs not having Income from Business or Profession.
This way there are many forms and an individual can choose the form which suits him.
Gifts & Tax
Many individuals are under perception that gifts are free from tax, they would have been right if they had perceived and told the same before two or three years but not from now onwards. Gifts costing above 50,000 rupees will be taxed from now onwards. Previously gifts were tax exempt and to reduce tax liability people used to pay money to someone they owe in the form of gifts but now gifts in any of the form will be taxed according to their monetary value.
Gifts Exempted from Tax
- Gifts from relatives on the occasion of marriage
- Gifts received from parents and grandparents
- Gift received by a daughter-in-law from her parents-in-law
- Gifts received by way of a will and inheritance
On the other hand gifts received by a son-in-law from his parent-in-law will be taxed. If you are thinking that you can accept gifts (above 50,000) received in name of your child who is a minor then think once more, because if it is received in the name of minor then it will be added to parent’s income for calculating IT and if both parents are working then one with higher income will be added with this value of gift.
All losses can be deducted to calculate income tax.
Individuals feel that all the losses that they have suffered can be set off or deducted from the income. It is not completely true because all the losses cannot be set off while calculating the income tax. First of all if you do not file your income tax on the last date all the deductions and the losses will not be taken into consideration by authorities. An individual will get capital gains when he sells securities in the market. An individual cannot deduct the capital losses under other heads of income.
Short term capital losses can be set off against long term capital gains, but long term capital losses cannot be set off at once.
In case of long term capital losses, it can be carried on for next eight years and can be taken as deduction in any of next eight years but an individual can opt for this option if he has filed the income tax within the due date.
Rent paid can be taken has Exemption.
Most of us think and are of the opinion that whatever rent we pay has exemption while calculating.
Salaried persons
It is exempt for a salaried person if house rent allowance (HRA) is provided to him as a part of compensation for the services rendered. The maximum amount of exemption that he can get is the amount paid by the employee.
Other Individuals
Then what about other individuals, who do not receive HRA, government has also made a provision under section 80GG can avail a maximum deduction of Rs 2000 every month.
Interest on savings account is non-taxable.
The interest on savings bank account was non-taxable until Section 80L was in effect but once 80L was removed interest from savings bank account have come under tax scanner. The tax is deducted at the source if the interest from the SB account is more than 10,000 rupees. So if you are looking to reduce your tax liability then make sure that you spread your deposits across different banks and don’t put all your money into a single bank’s account.
Section 80C benefits are applicable for investments on bank FDs and insurance premiums
There are wide ranges of investments which come under the 80C and which have tax deductions. These include;
- Employee Provident Fund (EPF)
- Public Provident Fund (PPF)
- National Savings Certificate (NSC)
- 5-year bank fixed deposits
- Insurance policies
- Equity-linked savings schemes (ELSS)
- Unit linked insurance plans (ULIP’s).
Total amount made in avenues lime ELSS, ULIP’s, Public Provident Fund (PPF), NSC are exempt for tax calculation.
Investors are under the perception that whatever investment that they do in the above said avenue are exempt from tax but in reality it is not so. The whole of section 80C can get you a maximum deduction of 1,00,000 rupees only, whatever the amount invested be (more than one lakh rupees and if the investment is less that a lakh say for example 50,000 rupees then only 50,000 will be deducted. If the total amount invested in all the above schemes is say 1,30,000 then extra 30,000 is not taken as a deduction.
Interest on fixed deposits is non-taxable.
We know that interest on savings account is taxable than what about interest obtained from the fixed deposits. You need to pay taxes on the interest from fixed deposits and what if you have opted for taxing the lump sum amount on maturity; even in this case you needto pay tax for the interest that you are liable to get.
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