7 worst mistakes to avoid by salaried when filing income tax returns

Get Income Tax Benefits as per your salary slip which includes 3 salary components earnings, allowances, and deductions. A penny saved is a penny earned but only if done correctly.

Salaried employees are no doubt the major chunk of taxpayers in India and have to pay flat taxes as per tax slabs that you fall into.

The best way is to plan your Taxes well in advance at the beginning of the year, consider all tax saving options, and earn. Avoid last-minute rush and keep things simple and straight forward.

All tax planning for salaried employees depends on your outcome whether you are Investing to meet your financial goals or are spending to just take the benefit of tax laws.

Early and regular investments help you to reduce your tax liability as well as to gain financial freedom as the money starts working for itself early on.

It’s important to keep a close watch on your Tax slabs and how you can effectively plan between old and new tax regime and also by gifting the asset along with income among the family members such that house tax as a whole is saved within the boundaries of tax laws applicable which are also some of the hidden ways to save tax.

Lets take a quick look at mistakes to avoid and tax benefit for salaried person

Income tax exemption for salaried employees

80TTA– Interest Income

One of my Gynae Doctor aunt called me to get clarification on a few income tax laws that she was unaware of. She had discovered these mistakes due to the Income Tax Notice that she received.

She had invested in Fixed Deposits 5 years ago and had opted for Interest accruals, so these interests were not getting credited to her bank account, nor any TDS were deducted as her Total Interest Income on all Fixed Deposits was below ₹40,000/-per annum and she was unaware of checking with the bank about interest accrual each year.

2 problems faced later due to paying taxes on accumulated interest income at the end of 5 years,

-Received notice from IT for not showing in ITR form due to mismatch in Annual Information Return Data.

-Increased her tax slab due to increment in Salary Income.

Only the Total Interest Amount is charged to tax under the head “ Income from Other Sources” and not under Income from Capital Gains as a Fixed Deposit is not a Capital Asset. Only sale proceeds from the transfer of Capital Assets are taxed under “Capital Gains”

So, avoid postponing any interest income to later years and pay it as and when its due, irrespective of its receipt and avoid paying higher taxes later.

80TTA– Tax Saving FD

While filing Income Tax Returns of high net-worth Individuals, I have often noticed that they park their surplus funds in either their savings bank a/c or Fixed Deposits. The interest income @7% even if received remains 4.27% (39% including tax, surcharge, and Cess). Also, Interest Income is the only income that these instruments generate. If you have children above 18 years, this deposit can be transferred to them, so that House Tax can saved on such interest income by claiming benefit of lower tax slab.

So, this is a win-win situation. The children’s file is also built up for any future loans or requirements. Also for parents, it is a responsibility fulfilled and House tax saved by shifting to a lower tax slab bracket and enjoying the benefits of the same.

10(13A)-House Rent Allowance

My husband’s friend had once taken a house property in the same complex as ours say House 1, which is surrounded with beauty and all amenities. Later he started staying close to his office and children’s school House 2, which was a standalone apartment. He was claiming HRA on the rent that he was paying for House 2. He had put up House 1 on rent and was paying tax on it. All this he had done to get additional income, which did not work out well. Finally, he shifted back to his own sweet house 1.

Tax Saving for salaried employees are the provisions which are drafted to give benefits only for actual use and not to twist and turn tax laws to suit your advantage.

Tax Saving for Salaried Other than 80C

24 & 71B– House Property Deductions & House Property Loss set off

My other client had 2 houses, which she wanted to claim as Self-Occupied Property. She had read a provision which said she can claim 2 houses as Self-Occupied-Property. Any house beyond that will either be let out or deemed to be let out if not actually let out. She had put both the houses on rent and she was confused if she could still take the benefit of showing both the houses as self-occupied.

Will she be eligible to claim both houses as self-occupied property?

No!

Since she had put both the houses on rent, the actual rent received will have to be offered to tax after providing for a 30% deduction for repairs. This provision of offering any 2 houses as self-occupied works either if you or your parents are staying in the house or is kept vacant.

Many people out of ignorance and half-read provisions make such big blunders and get momentary pleasure but leads to stress when receive notice to explain further and revise the return to include all rental income and pay tax, interest and penalty on the same.

She had taken a Housing loan on it, on which she was paying Interest on a housing loan. The entire Interest on the Housing loan will be set off against the net rental income and the total interest was deducted such that ₹2,00,000/- net loss can be set off against all other incomes such as Salary Income, Any other Rental Income, Profits of business or profession, Capital Gains, and any Interest/Dividend Income.

Since her Interest on a housing loan was more than the net loss of ₹2,00,000/-, which was carried forward for 8 assessment Years to be set off only against Income from House Property.

Avoid taking benefit due to half-read tax laws to avoid tax, interest and penalty later. Also file tax returns and claim set off of house property loss against any income and reduce your tax liability.

115BAC-Old Tax Regime vs New Tax Regime

In Income from House Property, simple 3 questions will help you decide between old and new Tax Regime,

Have you taken a housing loan?

Yes

Do you stay in the house or are earning Rental Income?

Yes, staying

Do you wish to claim the Interest on the Housing loan as a deduction against all your Other Income?

Yes Then you have no other choice than to go for the Old Tax Regime and claim the benefit of Interest on Housing loan else you will loose it forever if opted for new tax regime.

Sec 80D– Medical Insurance Premium

My friend asked me if he could claim medical expenses of his mother(senior citizen) against his total income.

I advised him that Medical is divided into 3 parts,

1. Medical Insurance Premium
2. Regular Medical Expenses
3. Preventive Health Check-ups

Let’s say,
Your annual medical insurance premium for your mother is ₹50,000,
You spent on her medical expenses on her health and is ₹50,000
Her preventive health check-up costs ₹5,000.
You can claim a total deduction of only ₹50,000 under section 80D.

If your mother pays ₹50,000 towards her medical expenses on her health, then she can claim ₹50,000 against her income in her income tax return filing.

194R: TDS on directors’ remuneration in a private company

One of my clients received Remuneration from his company as he was a director of that Company. The Company had deducted TDS on it before actually paying it to him. Advance Tax payment on Directors Remuneration is the responsibility of the Director himself. Though the company deducts 10% TDS on directors’ remuneration if you fall in a higher tax bracket, do keep a check and ensure that tax has been paid up according to your tax slab to avoid interest payment later.

This is another major mistake I have seen people do out of ignorance.

Conclusion:

Cross tally if you have taken all exemptions, deductions, and all tax saving schemes in India into consideration before filing your income tax returns to see if all tax saving for salaried are taken care of.

When you are ready to file your tax returns, do send in all your income details on [email protected] and it will be done in less than half an hour.