Sep 19, 2008

10 Common Income Tax Fallacies

Ignorance of the law is no excuse.

Since law presumes that we are familiar with the law’s commands, we cannot plead ignorance. It is our responsibility to know and understand the law.

So let’s make a beginning to at least understand the broad provisions of income tax law which can help you in proper compliance as well as making the most of deductions and exemptions provided in the statue. We make a start with shattering some common misconceptions about income tax.

Here is the list of top ten income tax myths:

Filing I.T.R

1. Income tax return has to be filed before the due date
It is common perception that if you don’t file your income tax return by due date, interest and/or penalty will be imposed. The fact is that there is no interest or penalty if I.T return is not filled before due date provided tax is already paid and you file it before the end of the relevant assessment year (i.e., up to 31st March).

So, it is always advisable to file it either at the very beginning of the financial year or after the due date is over, so that you won’t have to rush at the last moment and wait in long queue.

However, in case tax is not paid before due date, simple interest @ 1% per month or part of the month is charged under section 234A from the due date up to the date of furnishing the return of income.

Besides, also remember that in case you have either business loss or capital loss to be carried forward, you need to file the return by due date; otherwise you lose the benefit of carry forward. For further details, please see
12 Practical Tips for Filing Income Tax Returns

2. TDS has already been deducted by the employer, so there is no need to file the return
Even if the entire tax has been deducted at source by the employer and there is no more tax liability, you still need to file your tax return.


House Loan benefits

3. Home loan for second house property is not eligible for income tax benefits
It is another popular misconception. First of all, let’s understand that there are two different I.T. deductions available in case of home loans. The EMI you pay is divided into two parts – principal & interest component. The repayment of principal is claimed as a deduction under section 80C and the deduction for interest component is allowed under section 24(b) of income tax Act under the head ‘Income from House Property’.

Both the above deductions have nothing to do with the number of houses you already have. In fact, you can have as many number of houses (and also as many loans against them) as you wish.

The only point worth remembering is that you are allowed only one house for self occupation and all other houses are deemed to be let out (even if they are lying vacant) and their notional rental income is subject to tax.
For further details, please see Amazing Facts about Income Tax: Taxation of Notional Income.

4. Maximum interest exemption available on housing loan is Rs 1.50 lakh
In case of self occupied house property, the maximum limit of interest deduction under section 24(b) is no doubt Rs 1.50 lakh. However, in case of let out/deemed to be let out house property, there is no limit; entire amount of interest paid, even if exceeding Rs 1.50 lakh is exempt.

Furthermore, in case of self occupied house property also, the interest deduction can exceed the maximum limit of Rs 1.5 lakh, if the property is owned jointly. In such case, each of the co-owner is entitled for separate deduction. For further details, please read
8 Tax Considerations to Remember Before Buying a Home.


Exemptions/Deductions

5. Interest on savings account and bank fixed deposits is exempt
No, it is taxable. Earlier it was allowed as deduction under section 80L, but since the section was abolished around two years ago, the entire interest is taxable. Therefore, though the amount may be miniscule, you need to disclose it and pay tax on it.

Legally speaking, most of people are tax evaders because it is a common practice among people not to include the interest in their taxable income which tantamount to concealment of income.

My advice to you is to start considering it as part of your taxable income, however small it may be. It won’t cost you much time or money.

6. Amount withdrawn from PF because of job change is exempt from tax
In case you are a member of recognized provident fund and change your job before completing a period of 5 years, and withdraw the PF amount, then all your previous years income gets recomputed as if the fund was unrecognized from the very beginning (i.e., the tax benefits you received on your own contribution u/s 80C/88 in earlier years will get forfeited) and further the employer contribution and interest received will be added to your current income subject to relief under section 89.

7. Interest on National Savings Certificate (NSC) is exempt
Interest on NSC is chargeable to tax on the basis of annual accrual specified in NSC rules. You have to consider it as part of your total income. However, it is eligible for deduction u/s 80C as it is deemed to have been reinvested on behalf of the holder. Net effect is that it does not increase your tax liability but goes towards reducing the Rs. one lakh investment limit available under section 80C.

So, start including it in your taxable income; it won’t increase your tax liability - just a slight reduction in 80C limit.

8. LTCG on shares is always exempt
Only long term capital gains arising from listed shares sold through a stock exchange are exempt. In other words, off-market transactions are not eligible for this exemption.

9. ULIPs can be surrendered after 3 or 4 years
Of course, you can surrender them but there are tax consequences. It has been specifically mentioned in section 80C that in case of termination of ULIPs before 5 years, all the deductions claimed earlier will be treated as income of the year in which surrender or termination takes place. Therefore aggregate deduction claimed earlier u/s 80C on payment of ULIP premium will be treated as “income from other sources” and you will be liable to pay tax on it. For further details, please read Unravelling the Ulips: 5 Secrets You Should Know About

10. If employer does not pay HRA or if you are a self-employed person, deduction for rent paid is not allowed
In such cases, you can claim deduction under section 80GG which is similar to section 10(13A) under which HRA exemption is claimed. But unlike HRA exemption, deduction of rent paid under section 80GG is subject to certain conditions and the maximum deduction cannot exceed Rs 24,000.

Also see:

1. Income Tax - 5 Common Sources of Confusion
2. 4 Ways to claim HRA Exemption Along With Home Loan Tax Benefits

3 comments:

  1. You are a Guru of investment and tax. Congratulations on the good work.

    I have the following question.

    Premium paid on ULIPs are calculated as 100% tax rebate/benifit but for other types of life insurance, only 33% of the total premium paid is considered as tax benifit is it true?

    ReplyDelete
  2. You stated "So, start including it in your taxable income; it won’t increase your tax liability"

    Why would I want to get my tax liability increased and lessen 80C??
    What if I do not declare at all for tax liability??

    ReplyDelete

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