The Financial Year 2019-20 is long over, and under normal circumstances most of us would also have completed the filing of Income Tax return by now. However, on account of COVID situation, the last date of filing returns for FY 2019-20 is now 31st Dec 2020. The last date for making deduction related contributions/expenses was till 31st Jul 20. We discussed in “ Are you Organized for Investing” about the various accounts that one should open. Those who had all these accounts available could make the necessary contributions with ease. Opening fresh accounts during the lockdown period has been difficult as most of the financial institutions are working from home.
The Three Phases
We have discussed in “ Tax Planning and Tax Efficiency” about categorization of different sources of income and corresponding tax implications. We focus on tax issues at the time of filing Income Tax Return pertaining to income of the previous Financial Year (FY). This generally happens only after the actionable period is over. WE can benefit more if we consider this as a wholistic activity covering the entire FY, culminating with the assessment of the IT returns. We can divide the issue into three phases as Planning phase, Execution phase and Closure Phase.
The Planning Phase
This is the time when we need to analyze all our likely income through all sources and their tax implications. Any accumulation of idle funds will generate tax liability and hence the cash flows need to be controlled.
For eg if the exemption on interest on savings account is limited to 10,000/-, it means that at 3.5% interest the aggregate average balance in the savings account(s) should be kept below Rs 2,85,000/-. Cash flows can be more than this on account of available balance and recurring income. One then needs to plan for a recurring investment to keep it under the defined levels. Now one easy option would be to put the balance amount in FD. But as we have discussed earlier, FD is not tax efficient as the entire interest is taxable at marginal rates. While the post-tax return will be slightly above the savings account rate of 3.5 %, the lock-in makes it less attractive.
The alternate option of Debt Fund (with Government securities as underlying asset) might be far more beneficial. Similarly, even if one is not in need of funds, he can redeem the holdings in equity which have made some long-term capital gains(LTCG). LTCG up to Rs 1 lakh are exempt from tax. The gains can be reinvested and they are now part of the invested capital. In case of Debt Funds, one might plan the timing, ie when to redeem units, based on the date of purchase. The timing should help the gains to qualify for long term capital gains and indexation.
If you are planning to sell some real estate, then you need to plan the deployment of capital gains to minimize tax outgo. If you want to minimize tax on salary to lowest possible, then you should plan for a certain amount of expenditure/saving/investment in appropriate avenues/instruments. You should plan the timing and quantum of each subscription and spread it over the year . Most instruments permit investment in bulk. But we generally resort to this towards the year end. A systematic monthly plan of subscription might be more convenient and cost effective.
The Execution Phase
After making the plan we have to meticulously execute it at the appropriate time(s) of the year. One should get familiar with Net Banking as it facilitates a lot of automation. This reduces the effort required in remembering what to do and when. For eg you can schedule subscriptions to NPS, PPF, ELSS, or Mutual Funds for desired amount and required frequencies in one go. After that one only needs to ensure that the requisite funds are available in the concerned account. The review of plan also continues throughout the year as per change in regulations. There may be variation in availability of funds which could be positive or negative. Or, there might be newer insights into a particular avenue/system. Recently Govt imposed tax on dividends received. This hints that the “Growth” option of mutual funds will be far beneficial than the “Dividend” option.
Tax is deducted at source (TDS) for most of the income and one need not bother about it. But in some cases, esp. capital gains, one needs to ensure that the due tax is deposited within the quarter. Else, if the overall tax liability exceeds the tax deducted/deposited, there is a possibility of some penal interest at the time of filing returns .
The Closure Phase
Once the FY comes to a close, we have to file the Income Tax Return. We have to provide all details of income earned from different sources and the tax deducted/deposited. The outcome of correct filing could be that the tax liability and tax deducted/deposited absolutely match, and there is nothing due from either side. In case of a shortfall in tax deposited, one needs to deposit the balance amount along with penal interest. In case of excess tax deposited, the tax authorities will refund the excess along with the earned interest. While the absolute matching case appears good and simple, it is the most concerning occurrence. It might mean that one has only transposed the figures given in the Form 16 by the employer on to the IT return form.
Even if you are using services of a Tax consultant/CA, you should have the basic idea of filing tax return. You will then be able to utilize their services appropriately. For eg. some people are in receipt of HRA and pay rent, but forget to claim rebate on rent paid up to the extent prescribed.
Collecting Relevant Details
Before setting out to fill the relevant form, one should collect the following documents/details:-
(a) PAN, Aadhar, Bank Details. One would require to fill these details in the IT return form if using the offline utility.
(b) Form 16. The employer provides this to us and we can derive from here most of the details that we fill in the IT return form.
(c) Form 26 AS. The link to this form is available through your online banking as well as the income tax website. This form contains the details of salary paid and TDS by the employer. The details should match with those in Form 16. In addition, it will have details of any other TDS like tax deducted on interest received on FD, as well as interest paid on tax refund. While TDS at 10% would have been deducted by the bank (on interest paid over Rs 40,000/-), the actual liability would be as per individual tax slab. From this year onwards information on financial transactions of varied nature shall also be available on the Form 26 AS.
(d) Capital Gains statements (if any). One should ask the broker, or concerned Mutual Fund House to provide a capital gains statement for the relevant FY.
(e) Details of Interest Income. WE receive interest in Savings Account(s), on FDs, PPF and DSOPF etc. Even if it is exempt from income tax, it needs to be mentioned in the relevant section of Income Tax Return form.
(f) Statement of Loan Repayment and Rental Income details. The concerned bank will provide the statement on loan repayment highlighting the principal amount and the interest amount.
(g) Dividends Received. One may be in receipt of dividends from Mutual Funds or Stocks which were so far tax free. But from FY 20-21 onwards they are taxable in the hands of recipient at applicable tax rates.
(h) Gifts Received. Gifts up to Rs 50,000/- are exempted from tax, still one needs to show in the return form.
(i) Income from Other Sources. Details of any other income from any other source should be culled out from the Bank accounts statement. These should be factored in the appropriate category to assess the tax implication.
Filing of Income Tax Return
Today there are very user-friendly IT return filing facilities available on the official site of Income tax authorities. Detailed guidelines on which one to use are also commonly available. Many of us utilize paid services to file our returns and some of us are the Do it Yourselves (DIY) types. I would however advise everyone, that once the details as discussed above have been collected, one should do a manual calculation to ascertain the overall tax liability.
If the self-calculated figures match with the automated figures generated by the IT return form, then there is reasonable assurance that the data has been fed at the correct place. This will also ensure that you are able to extract correct services from the paid service provider (if used). This will also be the time when one can see what was wrong in the plan (if there was any). And what needs to be done in the next year to minimize these figures. The cycle of planning, executing and filing of returns shall continue.
Common Follies
Some of the common omissions while filing IT returns are:-
(a) Complete reliance on the service provider, thereby foregoing some eligible tax refunds.
(b) Not declaring income from sources other than salary, amounting to tax avoidance which can invite penal provisions.
(c) Not paying taxes in due time, thereby increasing penal interest liability.
(d) Not factoring income of spouse and minor children earned from assets purchased out of funds provided by you.
(e) Not mentioning exempt income.
(f) Not filing IT Returns despite income beyond the prescribed threshold level. Even if income is below the prescribed levels, it is advisable to file returns. They will come in handy later for variety of reasons and purposes.
Income Tax Return (ITR) Forms
The various ITR forms are as under :-
