Have you been served a notice by the income tax department of late? If yes, don’t be surprised, for if tax consultants are to be believed, there has been a spike in the number of notices being served onincome tax assessees. The reason is improved monitoring due to stricter know-your-customer norms and online filing of returns, both of which have made data processing easier and faster.
That’s why the scope for nondisclosure of income, high-value transactions and non-filing/defective filing of returns has become very limited. So, say experts, do not get shocked or surprised if you get a notice from the income tax department seeking details of a transaction or source/proof of some income.
Rs 30 lakh is the threshold of net assets over which wealth tax is levied
1% is the wealth tax on the net value of assets exceeding Rs 30 lakh
Experts, too, say that there is no need to get flustered. A notice does not necessarily mean you have committed a crime. Even a minor error in tax return can invite a notice from the tax department.
“The process of filing tax returns has been changed tremendously over the past few years. Even a minor error may invite a notice from the income tax department for correction or explanation,” says Amit Maheshwari, Partner, Ashok Maheshwary & Associates.
“One should reply within the stipulated time. Generally, 30 days are given for reply by post or in person. Attach a copy of documents regarding income and investments claimed in the return. Consult a tax expert if complexities are involved,” says Sudhir Kaushik, co-founder, Taxspanner.com, a tax planning and filing website.
WHY YOU GET I-T NOTICE
Return not filed or delayed: Your employer deducted tax from you salary. However, you did not file the return.
In such a case, the tax department will send a notice asking you to file the return. The notice has to be responded to within the given time. Otherwise, you may be penalised.
Such a notice can be sent for any of the previous six assessment years. In case of delayed filing, the department can levy a penalty of Rs 5,000 a year. However, the penalty is not mandatory, and depends upon the discretion of the assessing officer.
Tax consultants say if there is no default in paying tax, the taxpayer is usually not penalised for late filing.
However, if any tax is due, the department charges 1% interest per month from the due date.
Mismatch in tax credit: Tax deducted at source, or TDS, figure in your Form 16 may be different from the actual tax credit mentioned in Form 26 AS, a document issued by the income tax department that has all your tax-related information such as tax deducted, refund, etc, against your permanent account number (PAN). In case there is mismatch between the two, the department goes by the figure in Form 26 AS.
The mismatch could be because either the employer has not deposited the tax deducted from your salary with the department or has credited it in someone else’s account. In such a case, you have to file a rectified return.
If the employer has not paid the TDS to the tax department, point this out to him. In case the tax has being credited to someone else’s account, furnish the TDS certificate to the assessing officer for making the necessary changes.
Inadvertent/wilful non-disclosure of income: What if you made capital gains by selling stocks/bonds, earned interest on fixed deposits or had rental income, but did not report these in your return? Improved tracking by the income tax department means hiding these is difficult and may lead to serious repercussions in the form of penalty and prosecution.
For instance, in case of concealment of income or non-payment of tax, the penalty can be 100-300% of the amount due. So if the tax due is Rs 20,000, you may have to pay a fine of up to Rs 60,000, besides the due amount.
“To invest in equities, you need a demat account, and for that you need a PAN. So, the tax department gets all the information. You also pay STT (securities transaction tax) and so again the government has all the information regarding share purchases. Even when you book capital gains, it is a banking transaction, and you face the risk of coming under the tax department’s scrutiny. You run the risk even otherwise. For instance, if there is an inquiry against your (stock) broker, you can also get a notice,” says Rakesh Nangia, a chartered accountant and managing partner, Nangia Co.
However, one must know that there is no tax on long-term capital gains and dividend income from equities. Only short-term capital gains (made by selling shares held for less than a year) are taxed.
Non-disclosure of assets for wealth tax: Not many people know that if they own unproductive assets such as urban land, vacant house, personal car, gold, expensive watches, paintings, etc, they are liable to pay wealth tax if the net aggregate value of these things exceeds Rs 30 lakh. The tax rate is 1% on the amount over and above this Rs 30 lakh threshold.
If you have assets whose value exceeds Rs 30 lakh, you have to file a return for wealth tax as well. However, first home is exempt from wealth tax.
“Many individuals are not aware that they have to file a wealth tax return. The method for determination of net taxable wealth is also not known to many,” says Tapati Ghose, senior director, Deloitte Haskins and Sells.
Valuation of property, jewellery, etc, can be a tedious process. You can approach government-approved valuers for this. The second home is valued on the basis of rental income while jewellery is valued at the market price.
“Wealth tax provisions have not been rigorously implemented in India. These mostly involve immovable property and jewellery. You can take help from experts to value your assets,” says Amit Maheshwari of Ashok Maheshwary & Associates.
Notices for high-value transactions: Any high-value transaction (with or without quoting PAN) that you thought you can get away with can invite a notice from the income tax department.
The tax department closely scrutinises individuals with bank cash deposits worth Rs 10 lakh or more in a year, credit card purchases of Rs 2 lakh or more, mutual fund investments of Rs 2 lakh or more, or purchase of bonds and debentures worth Rs 5 lakh or more in a year. Besides, sale or purchase of property worth Rs 30 lakh or more also attracts attention of the tax department.
Under the law, details of such transactions have be furnished by the entity with which you are doing the transaction. For example, if you have Rs 10 lakh or more in the savings account of a bank, the respective bank has to file an annual information return with the department.
Such tight monitoring means the taxman may send you a notice asking you to file a return. Also, if there is a sharp discrepancy between your earnings and spendings, the tax department may ask you to explain your sources of income.
“Many of the above notices may lead to the department raising a tax demand, which if not dealt with expeditiously could lead to your bank accounts being attached,” says Tapati Ghose of Deloitte.
From June this year, the government has made it mandatory for buyer of a property worth Rs 50 lakh or more to deduct 1% tax from the payment to the seller and deposit it with the income tax department. The buyer needs to issue a TDS (tax deducted at source) certificate to the seller.
Investment in the name of spouse: Investing in the name of spouse, children or even parents is common practice. But one thing that must be kept in mind is that even if the investments are in someone else’s name, they have to be mentioned in your tax return because of the income clubbing provision in the Income Tax Act.
Failure to do so may invite a tax notice to the person in whose name you have invested.
“It is a normal check, so do not panic. Theoretically, you have not done anything wrong. All you need to do is explain that these are not your earnings and, therefore, not liable to be taxed,” says Vineet Agarwal, partner, KPMG.
As per Section 64 of the Income Tax Act, any income from investment made or asset purchased in the name of close relatives (spouse, minor child or daughter-in-law) is clubbed with the income of the person making the investment and taxed accordingly.
This applies to all types of investments such as shares, fixed deposits, land, building, post office savings and mutual funds.
Further, income from assets transferred directly or indirectly other than for adequate consideration to a person or association of persons who may benefit the individual’s spouse or son’s wife are also clubbed with the transferer’s earnings.
How to deal with tax notices
Do not panic, simply oblige the taxman. Respond to the notice, and furnish the documents and information the department has sought. File a rectified return and pay the tax due, if any, within the stipulated period.
In some cases, tax officials may ask you to be present in person for checking returns filed by you. You can either represent your case yourself or authorise a tax expert to do so. The latter option is better as a professional will fully understand each and every explanation sought and respond appropriately.
“In case there are no complexities in your return, attend the hearing yourself with all income/investment proofs. Else, hire a tax expert. Those who consult a tax expert online/offline are less likely to get a notice because the compliance requirement is being managed by a professional,” says Sudhir Kaushik of Taxspanner.com.
Not responding to the notice could cost you a lot of time, money and peace of mind. In some cases, it could also lead to imprisonment.