“The hardest thing in the world to understand is the income tax.” – Albert Einstein
Income Tax – hardest to be understood by the genius of Albert Einstein, then what to say of the layman or even professionals like us. With this article I have attempted to simplify this hardest thing for better the understanding of our readers. Here I have covered items of incomes which are taxable, but unknowingly we tend to ignore, thus remain unaccountable in our return of income due to sheer ignorance. But it is important to take these into account to make your life easier.
Under the provisions of Income Tax Act, you do not have to pay any tax in respect of a house property which is occupied by yourself or your family members. This tax benefit is available only in respect of one residential house property. However, in case you own more than one house property and all are occupied by you, you have to exercise an option to treat one of the house as self-occupied for the purpose of income tax and offer notional income in respect of the other house/s. Majority of the tax payer are under the impression that since no rent is received by them, they are not liable to pay any tax on extra house property.
In case the second house is let out, rent received in respect of that house is anyway offered for taxation. However, in case both the houses are occupied by you, ensure that you offer a notional income in respect of the house chosen by you as such. The income to be offered is an amount of rent which is expected to be received by you in respect of this property. Your Chartered Accountant will be in a position to help you in ensuring that your tax treatment of additional property is correct.
Gifts or other benefits received by the person carrying on business
Many businessmen receive tangible and valuable gifts from their business associates in the course of their business. As these are not reflected in the bank account, hence these go unreported, but these are taxable as business income. These include gift of any tangible as well intangible benefits like paid holidays etc. received from business associates in the course of business. Ensure to disclose this to your Chartered Accountant.
Capital gains on units of mutual funds switched:
Some times due to below average performance of your investments in any scheme of mutual fund, you tend to switch these units to units under other scheme of the same mutual fund. Since the units are of the same mutual funds but of different scheme, this does not get reflected in the bank account and may escape notice of your Chartered Accountant. You may also have forgotten about these switches by the time you sit to prepare you tax return.
The switch effected by you may be in respect of units held for less than a year or for more than a year. The profit or loss on short-term units and long-term units entail different tax treatment. Even tax treatment is different between debt fund and equity oriented funds. Disclose such switch over transaction to your Chartered Accountant for proper and correct treatment of loss of profit on sale of such units.
There are other incomes too which people normally consider as non-taxable and one of these items is interest on saving bank account. Earlier there used to be deduction available under Section 80L in respect of bank interest and therefore this income was not shown at all. But this is not the case now but people still carry this notion and omit to offer interest on saving bank for taxation.
The other items which are normally not included by the tax payers under their income is interest received on bank Fixed Deposits (FD) presuming that since TDS has already been deducted by the bank, there is no need to offer it for tax. Please bear in mind that though tax is deducted at source on interest paid on Bank FD, the rate at which TDS is deducted and the rate which is normally applicable in your case is different. The tax is deducted @ 10% where your marginal rate of tax may be 20% or 30%. It is your liability to pay the difference between the tax already deducted and the rate at which you are liable to pay tax.
Also include interest in respect of Fixed Deposit with banks which have been renewed on maturity and are not reflected in your bank accounts. Do not forget to include the income in respect of NSC etc. purchased in the earlier years.
Income earned on investment of minor child:
As per the provision of Income Tax, the income earned by a minor child is required to be included in the income of the parent whose income is higher. Parents normally invest money belonging to their minor child received as gift on several occasions, in savings accounts, recurring deposit account or bank fixed deposits. The interest earned by the minor on these investments is required to be included in the income of the parent. However, please note that only income in excess of Rs. 1500 only is taxable in the hand of the parent and any income derived by each minor up to Rs. 1,500 is exempt from tax.
To conclude, I request you to include all the above items in your tax returns which are normally not disclosed due to ignorance or wrong perception.
This will certainly make your life easier.
If you are looking at discussing some other aspects of income tax or for any other income tax related queries, please get in touch with me at the email address given below.
(Balwant Jain is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. He can be reached at email@example.com)