20 Common Mistakes In Filing of Income Tax Returns

Common 20 Mistakes and Errors in Filing/Compilation of Income Tax Returns

’31^st July is the last date for filing the Income-tax returns. Please file the return on time to avoid the last-minute rush.’

Every taxpayer must have received such a message from the Income-tax department. Upon receiving such a message, we simply start to gather our various documents required for return filings such as Form 16, Capital Gains Statements, Form 26AS, Interest Certificates, and many more documents. Unfortunately, in the rush of getting these key documents in order, many of us miss small details that can derail the entire process of Income Tax Return filing.

Here we have provided a list of 20 such common mistakes that can be avoided for smooth tax return filing.

1. Failing to File I-T Return

If your income exceeds Rs 2.5 lakh, you need to file an Income Tax Return. Remember that this income is calculated before accounting for all the deductions.

2. Incorrect Personal Details including Bank Details

Providing incorrect personal details in your ITR can create several issues like this. It may lead to verification issues.

Income Tax Department transfers all income tax refunds directly to the bank account. Therefore, always share correct bank account details for the income tax return of an active account. Also, need to ensure that the bank account is prevalidated as the refund is issued only in the prevalidated bank accounts only.

3. Not reporting all bank accounts

A taxpayer is required to report all the bank accounts held by him in the previous year. However, your dormant accounts could be left out. Even all the joint accounts are required to be reported.

4. Failing to report income from the last job

If you have switched jobs in a financial year then income from your previous job must be reported while filing an income tax return along with income from the current job.

5. Non-Disclosure of Foreign Assets and Income

It is mandatory for all ordinary resident taxpayers to disclose correct details of their foreign assets and income outside India in their income tax returns 

6. Non-Disclosure of Losses being/to be carried forward

In order to carry forward certain losses incurred during the year to set off against income in future years, it is mandatory to file one’s income tax return on or before the due date.

The income tax returns provide for different schedules depending upon the type of the asset. One needs to ensure to report the correct asset class according to the period of holding and other applicable provisions. 

7. Interest earned on NSC is tax-free

If you think that the interest earned on National Savings Certificate (NSC) is tax-free, you are wrong. The interest is fully taxable. Although this interest can be claimed as a deduction under Section 80C for all the years (except the last year), you must make it a point to mention this income as ‘income from other sources’ to get the benefits of Section 80C. Otherwise, you may have to end up paying taxes for it. 

8. Not reconciling income with Form 26AS/AIS

It is of utmost importance to reconcile and disclose income in your tax returns in synchronization with income reflected in Form 26AS. The scope of AIS (earlier, 26AS) has been widened drastically so as to report more and more information in possession of the department to the taxpayers.

Taxpayers must check the AIS before filing the income tax return. It can act as a cross-check measure while filing income tax returns. It contains many high-value transactions carried out by the taxpayers, a few income details, TDS, TCS, Income Tax refund, etc details. In case of any discrepancy, the same should be intimated to the deductor/department and get the same rectified. 

9. Non-Verification of e-filed ITR

Most taxpayers are required to file their income tax returns electronically. However, only furnishing the return electronically is not enough and you are also required to verify the return so that your identity is authenticated. The same can be done either by posting the ITR-V to CPC, Bangalore, or via any of the e-verification modes available. 

10. Non-Disclosure of Exempt Income

Taxpayers need to be more cautious so as to incorporate all income, even exempt income, in the ITR forms. Exempt income like LTCG on shares up to Rs. 1 Lakh, LIC Money back/Maturity, PPF Interest, Agricultural income, etc are ignored by taxpayers for the reason that it is tax neutral. However, reporting serves a dual purpose; it not only provides correct information in the ITR but also provides evidence in support of subsequent investments by the taxpayers which result in avoidance of notice by the department.

It may be noted that Dividend Income is no more exempt and has been made taxable from FY 2020-21. Accordingly, the same should be included in the taxable income while filing the Income-tax return. 

11. Non – Reporting of Saving Bank Interest and Interest earned on Fixed Deposit.

While interest income up to Rs 10,000 from savings accounts is exempt, one is required to disclose the income in ITR form and thereafter claim eligible deduction u/s 80TTA. 

Beware, one is required to pay tax on interest income earned from fixed deposits (other than Senior Citizen up to Rs. 50,000). No exemption of Rs. 10,000 , as in the case of Saving Bank Interest, is available in this case. However, taxpayers who are not aware of this rule, exclude fixed deposit interest from their taxable income, which should never be done. 

Also, People usually have a misconception that an FD is taxable only when it is matured, however, the information about the interest income needs to be reported every year to the ITD under the head ‘Income from other sources’. 

12. Tax on certain notional income

Taxpayers need to report not only actual income for taxation but also notional income,

For instance:

• Deemed rental income if taxpayers own more than two house properties, (If an individual owns multiple house properties, then any two of his house property will be considered as self-occupied, as per their choice and the remaining will be considered as ‘ deemed to be let out’)
• Gift if the amount exceeds Rs. 50,000/- is received from unspecified relatives,
• Purchase or sale of the property below its stamp duty valuation, etc.

13. FDR Interest exemption, in the case of Senior citizens, is PAN Wise

For a senior citizen, Interest income up to Rs 50,000 from savings accounts as well as FDR accounts is exempt; however, the limit is to be checked PAN-wise and not bank-wise.

14. Choosing the wrong tax return form and correct assessment year

The Income Tax Department has issued 7 types of income tax return (ITR) forms, and the selection of an ITR form for filling tax return depends upon the type of income and status of the taxpayer.

While filing the returns, one must make ensure to provide the correct AY. For FY 2021-22 the correct corresponding AY is 2022-23. Mentioning the wrong AY increases the chances of double taxation and attracts unnecessary penalties.

15. Not reporting interest received on income tax refunds

Interest received on Income Tax refunds can be traced from Form 26AS and should be reported as income from other sources while filing your Income Tax Return.

16. Not clubbing Minor Child Incomes

According to the Income Tax Act, there are certain instances where the taxpayer is required to club the income of his minor child or spouse with his own income and pay taxes accordingly. However, an exemption of Rs.1500 is given by the income tax department to each child.

17. Not reporting capital gains on switching of mutual funds

These transactions are not reflected in the bank statements and so do not find a mention in the Income-tax return. The profits earned on such transfers are left unreported as they are not routed through the bank account of the taxpayer. As switching or shifting from a particular scheme to another may result in profit or loss, therefore it should be reported in the Income Tax Return.

18. Not claiming correct deductions

Some donations are 100% allowed but others are only 50% allowed. Same like certain returns on investments are tax-free while others are taxable. Hence such deduction should be claimed with caution to avoid scrutiny from the income tax department.

19. Assets/Liabilities Statement

A person with an annual income of more than Rs. 50 Lakh are required to show the assets/liabilities statement in the income tax return in Schedule ALS. Taxpayers should be careful while filing such ITR with Schedule ALS. 

20. Not Filing Revised Return

After filing your tax, if you discover some error, then it is necessary to rectify your mistake and file the revised return. It is permissible and can safeguard you from problems down the road.

Bottom Line

You can use this list of the 20 most common mistakes that tax filers make as a checklist of things that you must avoid. Doing so will help ensure that the tax authorities accept your ITR. That way, you do not have to worry about receiving an income tax notice or paying fines and penal interest charges.

Disclaimer: The above compilation is for guidance and educational purpose only. You are requested to consult the income tax practitioner before finalizing the Income-tax returns.

Author:  CA Mridul Gupta, MRIDUL GUPTA & CO, Chartered Accountant in Practice from Delhi and can be contacted at [email protected]).