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Realty Tax Filing: Errors that can lead to a tax notice

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As per tax laws, an individual is required to report all sources of income and file ITR (Income tax returns) using the correct form applicable to him. It is mandatory to file ITR with utmost care because even a small mistake can land you in a trouble getting tax notice. The tax authorities have spruced up their efforts to catch the evaders. The new ITR forms seek detailed disclosures paving no scope for taxpayers to conceal income in their returns. Moreover, the Central Board of Direct taxes mandate to file the returns online, barring super senior citizens above 80 years of age. The tax records are integrated online which can even detect a small mismatch resulting in an enquiry. The tax department usually issues notices after the return has been filed or after the assessment year has ended. Below are some listed tax filing mistakes resulting in a tax notice:

  1. Changes in ITR forms:
    Various changes have been introduced in ITR forms for the assessment year 2019-20 where the new forms seek detailed disclosures to plug tax leaks.
  2. Until last year, a consolidated report under the ‘income from other sources’ head is to be submitted.  From this year onwards, interest income from deposits (fixed deposits and recurring deposits), bank accounts, income tax refund and pass-through income has to be declared separately under each head. This enables no longer hiding or declaring selective interest income in returns.
  3. While selling an immovable property, it is mandatory to share PAN details, address and share in percentage, among other details of the buyer.
  4. Equity and debt interest from overseas investments is the other new entrant that needs to be reported very carefully.
  5. A lot of information gets automatically exchanged between countries under the information exchange agreements. In case of a mismatch in information, the return might be picked for scrutiny.
  6. Since the new forms seek detailed disclosures, you should start collecting all your bank account statements, records of financial transactions and documents related to foreign assets much before the last day of filing returns. Failure to report any information amounts to concealment of income and is liable for stiff penalties.
  1. TDS (Tax deducted at source) on property deals
    Any buyer who has purchased an immovable property worth more than
    INR 50 lakh has to deduct 1% TDS from the payment to the seller and deposit it in the government account. However, just a timely payment may not be enough to save you from the taxman. Experts say that every year several notices are issued to taxpayers on account of calculation errors in TDS.
  1. Not deducting TDS on rent
    The government extended TDS on rent to all salaried individuals and HUF in 2017. Earlier, it was applicable only to those who are required to get their accounts audited as per the tax laws. If you are paying rent above INR 50,000 per month, deduct 5% TDS from the rent paid and file it at the end of the financial year. Non-deduction of TDS is non-compliance with the tax law. The tax filer may have to pay a penalty equal to the TDS amount. One common mistake is to calculate TDS on the total rent paid in a financial year instead of every month. The condition of TDS is often misconstrued as applicable to rent above INR 6,00,000 per year. In reality, it is for rent above INR 50,000 per month.
  1. Misreporting LTCG (Long term capital gains) on equity
    This will be the initial year when taxpayers report long term capital gains from equity investments. LTCG above INR 1,00,000 in a year will be taxed at 10%. These gains are to be reported in schedule CG, section B4. Details of dates or name of the security transferred is not required, but accurate details about total consideration value, fair market value (FMV) and cost of acquisition are must. This can help in easy retrieving of statement on capital gains from your broker or mutual fund house.
  1. Reporting LTCG from equities in your tax return
    Reporting LTCG on equity gets difficult on selling more than one stock or MF (mutual fund) units as the form allows filling details of only one transaction. The cost of acquisition is computed by the form on the basis of FMV and actual purchase price. When multiple stocks are sold, both FMV and purchase price of each stock will be different. The taxpayer will have to calculate capital gains of each stock separately to arrive at net gains. Reporting LTCG on equity in the current form is complex and the calculations can be cumbersome for the taxpayer.
  1. Mismatch in income and expenses
    The IT Department will now pry into social media accounts to detect any gap between expenses and reported income. If posts related to foreign holidays, luxury cars, 5-star stays, lavish social events do not fall in line with the declared income or the spending pattern is not commensurate with the income disclosed in the ITR, the taxman can knock the door.

However, not all tax notices should be a cause for concern. In the case of serious transgressions, returns will not only be picked up for scrutiny assessment but also slapped with hefty penalties. Similarly, simple calculation errors may get you a demand notice, asking you to pay due tax.

The above are some of the errors in ITR filing which leads to a tax notice. If you would like to know more about income tax updates and its impact assessment on your company, our team of experts can assist you. We can also assist you in tax structuring, transfer pricing certification / documentation, international taxation and withholding tax treaty issues and representation for your tax assessments.

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