Nobody likes missing deadlines, especially if they have been set by the taxman. Yet, thousands of taxpayers are unable to wrap up their income-tax planning by 31 March. Over the past two weeks, we have received several queries on income tax from our readers. Some want to know if they have calculated their tax liabilities correctly, others are worried if they will face penal action because of non-payment of tax by due date. There are also those who have overpaid income tax because of haphazard planning.
Our advice to all such people: act now to get things in order, but there is no need to panic. The tax department will not issue a notice just because you are a few weeks late. Similarly, if you have paid excess tax, don't worry. You can get a refund after you file your incometax return.
If for some reason you were unable to pay the tax that was due on income during the previous financial year, you can do so now by paying a small penal interest. The taxman charges a nominal 1% on the unpaid tax for every month of delay. So, if you have to pay Rs 15,000, you will be charged only Rs 150 as interest if you pay in April. But prevention is better than cure. We look at five common reasons that lead to underpayment or overpayment of tax and how you can avoid them this year.
Reason 1: Double exemption due to job change
When you join a company, you are too preoccupied with the new job and people to make sure you stick around for a long time. Income tax is the last thing on your mind. The result: lower tax deduction because of incorrect computation of your income. This is because you get the basic exemption on income and Section 80C deduction from both the previous and current employers.
Tax experts say this is a common problem because companies don't ask for details of the previous income from a new recruit. "A company's liability is limited to deducting tax on the income earned by an employee. It does not extend to any other income, rent or previous salary, so few companies care to factor in the previous income," says Delhi-based chartered accountant Vivek Bhargava.
When a client showed his income documents to Bhargava last month to know how much he needed to invest to save tax, he was shocked to learn that he had Rs 26,000 more tax to pay. He had changed jobs in August 2008 and had got the basic exemption and Section 80C deduction from both employers.
The problem is aggravated because companies usually go slow on deductions in the first few months of a financial year. So, if an employee leaves after three months, he already has unpaid taxes adding up in his account.
Don't think that you can get away by not declaring the previous income. The tax department has recently started matching the TDS data from companies with the salary income reported by individuals in their returns. "Non-reporting of total salary income is a sure shot reason for receiving an income-tax notice," warns Ankur Sharma, managing director of the tax filing portal Taxspanner.com.
How to avoid it: When you change jobs during a financial year, always report your income and tax deductions from the previous employer to your new company. Employers too should be more proactive in finding out an individual's total income for the year. "They should include a session on income tax in the orientation programmes for new employees. A new joinee should be clearly told about the implications of not reporting the income from the previous employer," says Sharma.
Reason 2: Assuming TDS to be the total tax liability
Tax deducted at source (TDS) is perhaps the most misunderstood phrase in the realm of income tax. Many taxpayers are under the impression that they don't have to pay any tax on the income for which TDS is in place. This is not true. The TDS is just an interim deduction of 10.3% or so and is usually not sufficient to cover the total tax liability. If the individual's income falls in a higher tax bracket, he will have to shell out more tax. This is particularly common in case of self-employed professionals and consultants who get lumpsum payments with a small TDS.
How to avoid it: Calculate your tax liability correctly after all deductions and exemptions. There are many work-related expenses that self-employed professionals and consultants can legitimately deduct from their income. It's a good idea to take the help of a chartered accountant or even a tax preparer if you are doing this for the first time.
Reason 3: Not factoring in income from other sources
They don't know it, but a lot of taxpayers are not reporting their income correctly. The interest earned on bank balances, fixed deposits and other securities is fully taxable. Another popular misconception is that the interest is to be taxed when a bond or a fixed deposit matures. In reality, the tax is payable on the interest earned every year even though the investor hasn't recieved that income yet.
The other ticklish area is capital gains. If you have sold debtbased mutual funds (monthly income plans, bond funds, income funds, etc) during the year, the profits from the sale are taxable. If the holding period is less than a year, the profits are added to your income for the year. If you sell after one year, the profit is taxed at a lower rate of flat 10% or 20% after indexation. In either case, there's tax to be paid. Similarly, stocks and equity funds sold within one year of purchase invite a 15% tax on profits. "But few taxpayers know how to calculate the tax and even fewer pay it," says Bhargava.
How to avoid it: Include the interest earned on various deposits in your income for the year. Also include short-term capital gains from nonequity investments such as debt funds, gold funds and gold. Calculate the tax on the short-term capital gains from stocks and equity-based mutual funds separately.
Reason 4: Not making Sec 80C investments on time
This magazine has repeatedly extolled the virtues of planning taxes well before the Rush of March begins. It not only gives you peace of mind but also allows you to make an informed choice and pick the Section 80C option that best suits your risk appetite and financial circumstances. "People who wait till the last few days to make their tax-saving investments end up making knee-jerk decisions and choosing the wrong products," says Kartik Varma, co-founder of financial advisory firm, iTrust Financial Advisors.
There's another problem. Employers usually want proof of investments by the end of February or latest by mid-March. Investments made at the last minute are often not taken into account while computing the tax liability. So, tax is deducted and you then have to claim your refund from the Income Tax Department after you file your return. "Income-tax refunds take their own sweet time to reach the taxpayer, so it is better to avoid such situations," advises Surya Bhatia, chartered accountant and partner, Asset Managers.
How to avoid it: Start investing in tax-saving instruments from April itself. There are enough choices ranging from equity and debt to insurance. Choose the instrument that suits your risk profile and financial goals. Don't wait for the fag end of the financial year to make a suboptimal choice.
Reason 5: Not submitting relevant forms to avoid TDS
As mentioned earlier, TDS is an interim deduction from the interest earned on deposits. If the interest earned from deposits in any particular bank branch exceeds Rs 10,000 a year, the bank will deduct TDS. However, if the investor's income is below the basic exemption limit, he can file for TDS exemption by filling up a declaration form. However, remember that submitting false information and misreporting of income is a serious crime and is tantamount to tax evasion.
How to avoid it: Any individual whose income is below the exemption limit can fill up Form 15G to avoid TDS. Senior citizens need to fill up Form 15H. The forms have to be submitted to the bank branch in which the deposits were made. If an investor wants to avoid filling up the declaration forms, he could consider spreading his deposits across several bank branches.
So, be better prepared this year
Now that you have got a fix on which kind of income is taxable and how to calculate your tax liability, make sure that you pay the excess tax on time. Given above is a time table of the advance tax payment for you. Follow it, and you will not find yourself tied up in knots in March 2010.