Income Tax Return filing: Things to keep in mind while filing taxes

ITR Filing

Albert Einstein had apparently said that taxes are the hardest thing to understand in the world. While tax filing is supposed to be easy, most tax-payers are befuddled by the various rules and details to be included.

Here is a primer that decodes main queries around tax filing.

Which regime to choose?

The choice really depends on the income and exemptions taken. There are online calculators available to check which regime will entail lower taxes. There is flexibility to change the tax regime at the time of filing. This is allowed for non-salaried people only once, but salaried folk can change the tax regime as desired.

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So irrespective of the tax regime declared to the employer, an employee can switch to the more beneficial one at the time of filing taxes. However, keep in mind that belated returns cannot be filed in the new regime and also certain set off and carry forward provisions may not apply for house property.

As such, choosing a different regime each year may be cumbersome to govern.

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What are all the incomes to be declared? What about tax-free incomes like gifts?

Rule 1 of taxation is to always declare all income including interest on savings accounts, dividends, interest income, rental income, etc. Smaller incomes like interest on savings accounts and tax-free incomes like insurance policy proceeds get missed out as taxpayers feel there is no tax applicable on them. However, per the Income tax Act, all incomes must be declared for transparency.

Not all incomes thought to be tax-free are actually so. For example, only gifts received from specified relatives are tax free. Gift received from others above Rs 50,000 per annum are taxable unless received on special occasions.

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Some insurance proceeds are also not tax-free, such as policies where:

a. The annual premium in case of unit linked insurance policies (ULIP) exceeds 10 percent of the sum assured (for policies issued after 1st April 2012).
b. The cumulative yearly premium in case of non-ULIP policies is greater than Rs 5 lakh.

Can my spouse and I both claim HRA and home loan benefits?

Yes, both HRA and home loan benefits under section 24 and section 80C of the Act can be claimed. Note that HRA can be claimed only on the house that the taxpayer has rented. A stamped rent agreement and proof of rent payment is required to claim the HRA.

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In case one has not submitted the proof to the employer and TDS has been deducted, the same can be claimed at the time of filing taxes by providing the supporting documentation.

In case of home loans, if both the co-applicants want to claim benefits under section 24, they can do so provided they are the co-owners of the property. Further, all deductions can only be made proportionate to the amount paid by each party.

Is capital gains tax to be paid on securities bought or sold?

Except in case of foreign stocks, capital gains tax is applicable only on sale of stocks and mutual funds. ITR 2 is to be used for capital gains. Calculating the capital gains tax requires knowledge of how to apply indexation. Taxpayers can get capital gains statements from their brokerage accounts for stocks, and from mutual fund registrars CAMS and Karvy for mutual funds.

In case of foreign stocks, ITR 2 needs to be filed from the year of purchase. In ITR 2, the relevant details on the holding needs to be mentioned on page S2 and schedule FA. The taxation differs in case of foreign stocks, which are not listed in India.

The taxation of capital gains on foreign stocks is as follows :

- Holding less than two years: taxed per one’s income tax slab.
- Holding greater than two years: 20 percent, with indexation.

Indexation allows one to factor in inflation during the period of investment, reducing the value of the capital gains, and thereby the taxation. See here for a better understanding of this.

Any other tax filing hygiene

The Annual Information Statement (AIS) captures all financial transactions like investments, redemptions, cash deposits, remittances, dividends, fixed deposits held, etc. The AIS is available on the income tax portal, and should be matched by the taxpayer with his / her own data.

For complex ITR (income tax return) cases, e.g., those that involve holding foreign stocks, or even a regular ITR 2 filing due to capital gains, it is better to go with a chartered accountant. DIY tax filing leads to errors and the penalties of refiling are steep, plus dealing with tax notices is something one may want to avoid.