Podcast | Deep Dive - How to file IT returns

So it is that time of the year again when the tax guys come for your and my money. July is the last month to file tax returns for the financial year. The time we chase the finance guys at work for our Form 16 because the CA wants it asap. Today, we’re going to explain in simple terms what this whole process is and what you can do to come out the other side with most of your money still in hand.

The good news these days is, the tax filing process is not the same tedious run-around anymore. Earlier, one had to physically fill ITR or income tax return, forms and stand in queues to submit these forms at the income tax office. And then there was the wait for updates. However, the last few years it has been made mandatory for all assesses who earn more than 5 lakh rupees annually to file their returns online. In effect, it has now become quite convenient to not only e-file your returns, but also track your refunds and the processing of returns online.

It is in fact so easy now that the government has a new rule in place: miss the deadline for filing, which is 31st July 2018, and you’re liable to pay a maximum fine of Rs 10,000. That said, if you do file before 31st December 2018, that fine will be no more than 5000 rupees. Since it is now recognized that adults change their behavior only when faced with pain, I get the feeling a lot of people will overcome their procrastination and file their returns before the 31st of July.

If a taxpayer is supposed to file returns but fails to do so, an assessing officer can send a notice that the returns are to be filed. If the individual fails to file the return even after such a notice has been sent, he or she may have to pay a penalty. In cases of non-compliance with notices and warnings by the IT department, imprisonment under Section 276CC of the Act -  for three months to two years - plus a fine are what are waiting for the guilty party. If the amount of tax sought to be evaded exceeds ₹ 25 lakh, the imprisonment may range from six months to seven years along with a fine.

In certain cases, even if your income is less than taxable income, you might have to file your returns. For example, if you have a bank account or an asset or financial interest in any entity located abroad, you must file returns and furnish details of such accounts, assets and financial interest in the return. If a taxpayer does receive permission to file his returns after the deadline, he can still get the tax deduction benefits such as Sec 80C benefits, but won’t be allowed to carry forward the losses and adjust them.

In recent years, there has been a surge in the number of people filing IT returns. For instance, approximately 99.49 lakh new tax filers were added during FY18. That’s a 26% rise in the final tally of returns filers, and a much healthier rise compared to the 85.51 lakh new ITR filers added during FY17. In keeping with this trend, many more new taxpayers are expected to file their returns this year.

Now that we’ve dealt with the subtle nuances of Income Tax law, let’s get to the parts we really care about.

One of the most important parts of income tax us commoners care about is - exemption limit or threshold limit. I’m sure you all are well acquainted with these numbers but I’ll recount them anyway:

Individual taxpayers’ gross total income has three threshold limits, based on age-wise categorization:

First, citizens under the age of 60. The exemption limit is an annual income of Rs 2,50,000.

Next, for senior citizens - meaning people over the age of 60 but under the age of 80 -,  the threshold limit is Rs 3 lakhs

And finally, very senior citizens, meaning people over the age of 80, are entitled to a threshold limit of 5 lakhs.

Next, knowledge of slab rates helps us compute our tax liability more accurately. The slab rate applicable to an individual drawing taxable income between Rs 2.5 lakh and Rs 5 lakh has been reduced from 10% to 5%. Alok Agarwal, Senior Director, Deloitte India, said, “Earlier, an individual with taxable income up to Rs 5 lakh was entitled to a tax relief. Now, this limit has been reduced to Rs 3.5 lakh. Also the tax rebate has been reduced from Rs 5,000 to Rs 2,500.” Those earning an income in the region of Rs 50 lakh to Rs 1 crore will have to shell out a surcharge of 10 percent. Agarwal adds that a surcharge at 15% continues for individuals with income totalling above one crore rupees.

If you are filing returns for the first time, you can register on the income tax department’s official e-filing portal - www.incometaxindiaefiling.gov.in. Your PAN number, or permanent account number, will serve as a user ID. Remember that any mismatch in your name against the name in the PAN card will mean filing all over again. Keep your important documents handy - like your Form 16 and Form 12 BA you've received from your employer, tax credit statement, i.e Form 26AS, bank statements, PPF passbook. Also make sure you have proof of advance tax paid during the year and certificate of principle and proof of interest you've repaid on your loans - for example, home loan or education loan -  as well as a copy of your returns filed the previous year, your capital gains statement from mutual funds and brokers etc.

Yes, that’s a lot of offline documentation but those are required to ensure your online filing of income tax returns is a painless 15-20 minute task that can be finished before the FIFA world cup matches are finished each night.

Before we proceed, I must mention that income tax laws relating to property have changed this year. Taxpayers who own more than one property and claim tax benefits on the home loan interest they’re paying will not be impressed.

Till the last fiscal, you could get a tax break on the entire interest paid –  which is considered ‘loss’ – on home loan for let-out (or deemed let-out) properties. Starting this year, the government has restricted the benefit of set-off loss from house property to a maximum of rupees two lakh per financial year, and the balance loss can be carried forward to next eight years.

However, there is a change in capital gains tax that could cheer you up. Chetan Chandak, Head of tax research at tax consultancy firm H&R Block, says, “Holding period for capital gains to be considered on immovable property has been reduced from three years to two years; also, year 2001 will now be the base year for calculating the capital gains instead of the existing 1981.”

The two main forms to consider are ITR 1 and ITR 2.

Before we expand more on the types of forms, let’s look at te types of income. There are 5 types:

• Income from Salary
• Income from House Property
• Profits and Gains of Business or Profession
• Income from Capital Gains
• Income from Other Sources

Income from other sources means incomes from sources like that from interest on deposits, lottery winnings, gifts (from persons other than relatives) etc.

The type of ITR form a taxpayer has to fill has four major considerations:

• Whether you earned your income as an individual, a HUF (hindu Undivided Family), a company or firm etc.
• Your Residential status: Resident or NRI
• Type of income: Salary, Property, Business/Profession, Capital gains or other sources
• And Carry forward of losses: Losses being carried forward -  for example, loss on the sale of a capital asset- offers some rebate in future tax liabilities

Now that we are clearer on the types of income, let’s look at the type of forms.

You require an ITR 1 form if you are an Individual, you earn a salary or pension, you have income from one home property, you earn any Exempt Income up to Rs.5,000 (like agricultural income) and you have income from Other Sources. This excludes income from lotteries, racehorses, gambling, etc.

You require an ITR-2A form if you are an Individual or a HUF earning an income from salary / pension but are also earning income from more than one property as well as from lotteries, racehorses, gambling, etc.

And if you have additionally brought forward losses and also earned an income through capital gains, you require the form ITR 2.

If you are a self-employed professional or run a small business, you should use ITR-4  or the Sugam form.

Considering the number of variations, it is generally recommended that one consolidate all his incomes and proofs into a single easy-to-understand document, and categorize the types incomes under the different heads so that it becomes easier to select the right ITR form. This will help make the income tax returns process easier.

Till last year, if an individual or HUF was a partner in a firm, ITR-2 could be used if they didn’t have any other business income. Now, such taxpayers are required to file returns in ITR-3 only, irrespective of business income. Sandeep Sehgal, Director - Tax and Regulatory with Ashok Maheshwary & Associates, explained to the Economic Times: Until last year, only net taxable figures of salary and house property income were required to be disclosed. This year, detailed calculations in respect of salary and house property income are required in ITR-1 and ITR-4. Address of property would also be required for house property income.”

If all this information on the types of forms is confusing, don’t worry. When using a private tax filing portal to file returns, they usually choose the correct form automatically based on income and assets. Of course, if you are using the sarkari portal, you will have to choose the form yourself.

And now can we ever forget our dear friend, the Aadhar? Quoting this number is mandatory for resident taxpayers. Some experts go so far as to say that obtaining an Aadhaar number becomes imperative when a tax return is to be filed. WHat was that about minimum government again?

And now the nuts and bolts of checking your tax details. For starters, access your Form 26AS – your tax credit statement – which is available on govt portal and check if the tax deducted by your employer and other deductors tallies with your Form 16 and TDS certificates.

I’m sure you already know this - Form 16 is an important document required for the filing of income tax returns. It contains details of the total salary paid by your employer and the tax deducted from the income. This form is provided by the employer. Form 26AS can also be accessed through your netbanking account.

Analyst Sandeep Sehgal says, “All the tax credits for salaries and other income should be verified with 26AS. If there is any mismatch, it should be addressed to the employer or payer of such income.”

Then comes the minefield that you should keep a close eye on - income from interest. Analyst Sudhir Kaushik of Taxspanner.com says, “Many taxpayers think interest income from fixed deposits is tax free up to Rs 10,000 in a year. Others have the misconception that no tax is payable if TDS has been deducted.”

Only the interest earned on your savings bank account is exempt under Section 80TTA. Interest earned from FDs deposits and RDs is entirely taxable at the rate of your income bracket. Further, TDS is only 10% of the interest earned on deposits. If the individual falls in a higher tax bracket, he will have to pay additional tax. If your 26AS shows TDS on interest income, the tax department will send you a demand for additional tax on the income.

Apart from taxable interest income, you are also required to report exempt income. Even though dividends, interest on PPF and long-term gains from equity funds are tax free, it is safer to report them in the tax forms.

One issue that is the bane of salaried professionals is the misreporting of salary. Individuals who have changed jobs during the financial year have to deal with the complication of entering details after combining information from two Form 16s issued by two employers. Archit Gupta of Cleartax told the Economic Times, “This happens for cases where the employee could not report salary from first employer to the second employer. In such cases, a tax due is likely and must be paid quickly.” If you have a total income of, say, over Rs 50 lakh, you have to furnish several details, leading to complications. Gupta lists reporting of income from all sources as a prerequisite.

Now, let’s briefly count the type of exemptions we can file for. Ensure that you claim all tax benefits you are entitled for – even the ones you might have missed mentioning in the investment declaration submitted to your employer. If you have made any investments under section 80C and CCD of the Income Tax Act, then you entitled to deductions upto two lakh rupees. In case you earn extra from rental income, part-time business or interest earned on fixed deposits, then you will have to declare all of that as it will be counted under your total taxable income.

Archit Gupta of Cleartax adds here that “All Section 80C deductions can be claimed at the time of filing tax returns as also interest on home loan and HRA (or house rent allowance). Leave travel allowance (LTA) and medical allowance claims can only be claimed via the employer, by submitting proofs.”

Ah yes, HRA. Our favourite exemption. Under Section 80GG, you can avail of the benefit for the rent even if your salary package does not include HRA, provided you are not eligible for any housing benefit. The exemption is limited to the least amount of rent paid less 10% of total income; or Rs 5,000 a month; or 25% of total income.

In case you receive allowances like transport allowance, medical allowance etc. you can get tax exemption of up to Rs 34,200 while calculating your income tax. You should also calculate other exempt allowances like food coupons etc from your net taxable income.

India’s income tax laws also allow exemptions for serious illnesses. The treatment of ailments like cancer, kidney failure or AIDS entails huge expenses and these expenses are allowed relief under Section 80DDB to taxpayers suffering from such diseases. They can claim a tax deduction of up to Rs 40,000. If the person is a senior citizen, then the deduction can go up to Rs 60,000.

Also make sure that you list any donations you have made to charitable institutions, as employers usually do not account for deductions under section 80G.

Next, try to verify if there are any tax benefits you may have skipped due to lack of awareness. Income tax expert Chetan Chandak says, “Savings accounts generate income in the form of interest from deposits, which can be claimed as deduction to the extent of Rs 10,000 under Section 80TTA of the I-T Act. This is not widely known.” While deduction under Section 24 on interest paid for home loan is a commonly known tax benefit, most assume that they are entitled to it only if the loan has been sanctioned by an institutional lender.

Many taxpayers ignore this deduction if the tag of home loan is not attached to their loan even if they use it to construct or purchase a house. Chandak also told ET that “You can avail the tax benefits offered by this section even if it was a personal loan taken from relatives or friends.” The only condition to be eligible for this tax benefit is that the loan should be used in the construction or purchase of a house.

You can also avail of tax relief up to Rs 30,000 on interest paid on loan taken for revamp or reconstruction of your house.

And last but not least, don’t overlook the basics - when filing the tax return form, ensure that you submit details of all your bank accounts accurately. Especially the account you have chosen for receiving tax refunds. Alok Agarwal of Deloitte India warns that “Tax refunds will be credited by the tax authorities only in the account furnished in the return. There any many instances where refunds are not granted to assesses on account of incorrect bank details.”

Which finally brings us to the ITR V. This is a one-page verification document you must submit to the income tax department so they can begin processing your return. It is imperative you do not delay e-verifying your return. Despatch the printed and signed ITR-V to the CPC in Bengaluru by regular or speed post within 120 days if you have filed your returns online. For the record, the CPC has its very own pincode in Bengaluru - 560500. Your return filing will be considered incomplete without these and could attract late filing penalty. That 10,000 fine we spoke about.

And that, in brief, is how you file your income tax returns.