When it comes to filing Income Tax Returns (ITR), overlooking or omitting certain incomes is often due to ignorance or oversight rather than deliberate intent. However, failing to report all your income can have serious consequences.
This article explains the importance of accurately filing income tax returns and the consequences of not underreporting or misreporting income.
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But first, here’s a look at some commonly overlooked incomes and explains the importance of including them in your ITR.
Savings account and fixed deposit interest
Many salaried individuals only report their salary income when filing ITR or provide Form No. 16 to their Chartered Accountant, mistakenly believing that interest on savings accounts is fully exempt.
Additionally, some think that since Tax Deducted at Source (TDS) is already deducted from fixed deposit interest, it need not be reported again. However, this is incorrect.
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While interest on a savings account is eligible for tax deduction under Section 80TTA/80TTB, you must first include the interest in your income and then claim the deduction.
The details of interest credited to your savings account are available from the income tax department and through your Annual Information Statement (AIS).
Failure to include this in your ITR will likely result in a notice from the tax department.
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Similarly, while banks deduct TDS on fixed deposit interest, the TDS rate may differ from your applicable tax slab.
You must report the interest, pay any additional tax liability, or claim a refund if applicable.
For instance, if TDS is deducted at 10% but your tax slab is higher, you must pay the difference.
Conversely, if your tax rate is lower, you can claim a refund.
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Interest on fixed deposits automatically renewed on maturity and accrued income on National Savings Certificates (NSC) should also be reported if you use the accrual basis of accounting for interest income.
Capital gains from mutual fund units switching
Switching units between schemes of the same fund house is treated as a transfer under tax laws, even though it may not reflect in your bank statement.
This could lead to unreported profit or loss.
Such switches can result from poor performance of a scheme or a Systematic Transfer Plan (STP) mandate. Ensure these transactions are reported to your Chartered Accountant for accurate tax treatment.
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Understanding penalty under Section 270A
Section 270A imposes penalties for underreporting or misreporting income. An assessing officer, commissioner (appeals), principal commissioner, or commissioner may direct a person to pay a penalty ranging from 50% to 200% of the tax payable on underreported income.
What constitutes underreporting of income?
Underreporting occurs when:
Income disclosed is less than the actual income.
Filed ITR reports lower income than assessed by the tax officer.
No return is filed, but assessed income exceeds the basic exemption limit.
Income computed by the tax department exceeds that reported under special tax sections 115JB or 115JC.
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Examples of underreporting:
Not filing a return despite income exceeding the exemption limit.
Omitting income sources like FD interest in the ITR.
What Constitutes Misreporting of Income?
Misreporting includes:
Misrepresentation or suppression of information.
Failure to record investments or receipts.
Claiming expenses without evidence.
Recording false entries.
Not reporting international transactions.
Penalty amount under Section 270A
For underreported income due to misreporting, the penalty is 200% of the tax payable.
For other underreporting, the penalty is 50% of the tax payable. This penalty is additional to the tax due.
