Why I am getting Income Tax Notice?
My friend Neeraj got a shock last week, when he got an income tax notice to appear before the IT authorities and explain the difference between the tax paid by him and the amount as per their data base. There are many such cases reported recently due to the special drive of the government.
How the Income Tax department is getting such details?
Now the tax department is having an integrated database of taxpayers and can track almost all financial transactions. The Permanent Account Number (PAN) is mandatory for most of the financial transactions and this allows the department to collect such data. The PAN will tell how much you have earned and how you have invested or spend. The Central Board of Direct Taxes (CBDT) has a computer aided scrutiny system (CASS), which flags any discrepancy. If there is a mismatch between your income and expenses, it will raise a tax notice.
Why you are getting Tax notice?
There are some cases, where we miss out some information while filing returns. You will get a tax notice to pay the shortage of tax. The tax on interest income is such a case with many individuals. The bank will deduct TDS at 10% if the interest income is above 10,000 in a year, but the tax payer has to pay the balance tax as per his tax slab. This is not happening in many cases and can result in a tax notice.
The main reasons for getting a tax notice are:
1. Avoiding TDS by wrong use of Forms 15G and 15H
To avoid TDS by banks, you can submit Form 15G (form 15 H for senior citizens). These forms can be submitted only if your income is not liable to tax. But if you are trying to avoid TDS, by submitting these forms, you can get a tax notice. Submitting a wrong declaration can invite a penalty also. Practices like splitting the deposits in different banks or bank branches to avoid TDS will not help because PAN can relate all such cases easily.
2. Not mentioning PAN or quoting wrong PAN
The PAN is now mandatory for most of the high value transactions. If you do not submit it while making an investment, your income will be subjected to a higher TDS of 20 per cent, instead of 10 per cent.
If the PAN is quoted is incorrect, you could even be slapped with a penalty. This can create additional tax demand notice because the TDS will not be credited against your PAN. The tax refund can be credited to the wrong account if you submit the wrong PAN.
3. Difference in Form 26AS
The Form 26AS contains details of all the tax paid by an individual during a financial year. You can access your Form 26AS online through the website of your bank through net banking. Before you file your return, check whether the Form 26AS contains all details of your TDS. If there is any difference, follow up with the deductors and get it corrected.
If your bank or employer has deducted TDS, make sure it is mentioned in your Form 26AS. Also check whether all the investments with TDS have been duly mentioned in the tax return. Any mismatch can lead to an Income Tax Notice.
4. Mismatch in income Vs investments & expenses
Most high value transactions in investments in shares, mutual funds, bonds, real estate, gold etc are supposed to be reported to CBDT. The CASS matches this information with the Income tax returns filed by the taxpayer. If there is a mismatch between the income and investments/expenses, you will get a tax notice. Wherever you are quoting the PAN number, all such transactions are noted by Tax Department.
5. Not filing returns but Gross income is above basic exemption limit
If your gross income is above Rs 2 lakh, it is mandatory for you to file your return. You may invest in Section 80C etc and can avoid tax. But even if there is no tax liability, the return has to be filed if the gross income before deductions is above the basic exemption limit.
6. Not declaring the previous employer’s income, when there is a job change
This is common among those who changes job in the middle of the year. Both the employer will give you credit for the basic exemption limit and there can be shortage in TDS. Some even may not report the income from the earlier employer to the new employer. If your previous employer has deducted TDS on your income, the details will reflect in Form 26AS and the CASS will immediately flag this discrepancy and will issue a tax notice.
7. Filing return after the due date
You can file your income tax return till the end of the assessment year if there is no tax due. The tax return for the financial year 2013-14 can be filed till 31 March 2015 without any interest or penalty if all the taxes have been paid. However, if some tax remains unpaid, filing your return after the deadline could lead to a penalty. Ideally you should file the returns before the due date, which is 31st July, 2014 in this case. Another issue of late filing is that you cannot revise your return and you are not allowed to carry forward your losses.
8. Ignoring interest income/capital gains from mutual fund
The interest earned on fixed deposits, recurring deposits etc are taxable and should be mentioned in your tax return. There is no TDS on recurring deposit interest. But you have to calculate the interest income and pay tax for such cases where there is no TDS as per your tax slab. Capital gains from the sale of mutual funds also should be considered while calculating the final tax liability
Don’t ignore any communication from the tax department
If you ignore the intimations and notices from the tax department, you will attract trouble. If you do not respond, the interest and penalty keeps on increasing if there is a short payment.