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Common Mistakes to Avoid While Filing Income Tax Returns

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Albert Einstein once said, “The hardest thing to understand is the income tax.” While he was only joking, there is some truth in the statement. Every year, people face many rules, forms, and other technicalities that make the tax filing process intimidating. 

One can make common mistakes while filing ITR, which leads to fines, refund delays, missing deductions, carry forward of loss, and more. You can easily avoid these Common Mistakes While Filing Income Tax Returns and make the filing process much smoother by following these tips.

1. Filing Income Tax Returns using an Incorrect Form

When filing your returns, you have to select the correct ITR form based on the type of income you earn and the taxpayer category you belong to. You can choose from seven different types of ITR forms, From ITR-1 to ITR-7. For example, 

  • Form ITR-1 is for individuals who earn a salary or pension, individuals earning income from other sources, individuals earning income from a single house property with some exemptions, and individuals earning agricultural income less than Rs. 5,000.
  • ITR-2 is for individuals and Hindu United Families (HUF) who earn more than Rs. 50 lakh annually, individuals and HUFs generating income from foreign assets, and individuals and HUFs earning agricultural income of more than Rs. 5,000.
  • ITR-3 is suitable for individuals and Hindu United Families earning income from business or profession, income earned from being a partner in a firm, income from profits in unlisted shares, etc.

Similarly, each form from ITR-1 to ITR-7 is designed for specific types of income and taxpayers. Selecting the right ITR form can be confusing, which is why it’s one of the most common mistakes people make when filing their ITRs. Choosing the incorrect form can lead to the Income Tax Department rejecting your return by labelling it as ‘defective’ or ‘invalid’. File your taxes using the ITR form most suited to your income level and type.

Also Read: Income Tax e-Filing – How to File ITR Online?

2. Mentioning Incorrect Details on the Form

One has to enter a lot of information while ITR filing such as income, name, PAN, address, e-mail, phone number, bank details, and date of birth. You need to ensure that all the information you provide is accurate, and matches the information given in your PAN. Inaccurate information or discrepancies can lead to fines or processing delays. For example, if you are filing to get a tax refund and you enter incorrect bank details, you may not receive your refund on time. 

That’s why you should avoid last-minute hassle, as it increases the chances of making mistakes in your tax return. Double-check all your details and file your taxes timely.

3. Not Revealing All the Sources of Income

Every taxpayer must reveal all sources of income in the financial year. If you mainly earn a salary, but made some small profits by investing in the stock market in the financial year, those investment gains must also be reported in your income tax return. If you fail to include such income sources, it will lead to underreporting, which attracts penalties and even interest on the unpaid tax amount. 

Take another example – let’s say you earned Rs. 8,000 interest from your bank savings account. Under Section 80TTA of the Income Tax Act, interest income up to Rs. 10,000 from savings accounts is deductible. However, you still need to report the entire Rs. 8,000 as income and then claim the deduction. 

4. Failing to Report Income from Multiple Employers in Tax Return

If you’ve had multiple employers in the financial year, you have to report income from all of them. For example, if you change your job midway through the year, you’ll need to make sure that you add the income details from each employer. Get Form 16 from each employer which outlines the salary paid and taxes deducted at source (TDS). Don’t underreport your total income as it can have some serious consequences.

5. Failure to reconcile the Form 26AS statement

Form 26AS is an important document for ITR filing, as it provides details of tax deducted at source, tax collected at source (TCS), high-value investments, self-assessment tax, and any advance tax paid by you during the financial year from various sources. The tax deducted by your employer is given in Form 16, and it must match the TDS details provided in Form 26AS. Make sure to cross-check all details in Form 26AS with the information in your Form 16, otherwise it can lead to issues during the processing of your ITR.

6. Failing to review the bank statements

Bank statements show all your income and expenses during the financial year. Review them to understand the different types of income you received, such as salary, business profits, gifts, interest from savings accounts, capital gains, rent, dividends from investments, or payments from freelance work. Make sure you review statements from all your active bank accounts so your tax return can be accurately filed.

7. Excluding Tax-Free Income

As said before, every type of income, including income exempt from tax must be reported in your ITR. For example, if you redeem your mutual fund investment, the long-term capital gains (LTCG) tax on equity mutual funds is exempted up to Rs. 1 lakh. You may not have to pay any taxes on this profit, but you’ll still need to report it. Not reporting exempt income can lead to penalties.

8. Disregarding Interest from Tax Refunds

When you pay more taxes than you owe, you get a tax refund from the Income Tax Department. You also earn an interest of 0.5% per month from April 1 till the date on which you get the refund. According to the Income Tax Act, this interest is considered taxable income and must be reported in your income tax return. Remember that it is only the interest earned on tax refunds and not the principal tax refund amount that is taxable.

9. Failure to Verify ITR V Electronically

One of the most overlooked steps of filing an ITR is verifying it through e-verification. This process happens right at the end of the filing process and is important to completing your tax return submission. After you have filed your return, you can verify it through the Aadhar OTP verification, net banking, or the EVC process. E-verification must be done within 30 days of ITR filing. 

You can also complete this process offline by sending a signed physical copy of the ITR-V (Income Tax Return Verification) form to the Central Processing Centre (CPC) in Bengaluru through post.

10. Neglecting the Combination of Income

According to the Income Tax Department, multiple sources of income must be aggregated or ‘clubbed’. For example, if you have a minor child (under 18 years of age) who earns an income above Rs. 1,500, such income must be clubbed with your income. The specific rules for this sort of clubbing can be found under Section 64 (1A) of the Income Tax Act.

11. Implications of Filing an Income Tax Return Late

If you are an individual taxpayer without any audit case, the last date for filing ITR without any late fee is July 31st 2024 for Financial Year 2023/24. If you don’t file your returns before the deadline, you can be fined a late fee of Rs. 5,000 under Section 234F (Rs. 1,000 if annual income is less than Rs. 5 lakh). 

On top of that, you will have to pay an interest of 1% per month on the amount of tax payable till the date you actually file your taxes under Section 234A. The longer you delay your ITR filing, the more fines you’ll have to pay. You will also forfeit the opportunity to carry forward business losses, which can be used to offset income in future years and further reduce your tax burden.

Also Read: What Documents Are Needed for ITR Filing

12. Failure to retain records of deductions reported in the income tax return

Every deduction you want to claim in your ITR must be supported by appropriate documentation and valid proof. For example, if you invested in Section 80C instruments, such as ELSS, PPF, and life insurance, you must have proof of investments to claim deductions. 

Similarly, to claim Section 80D deductions for health insurance premiums, you must provide proof of the premium paid for yourself and your family. If you took out an education loan and want to claim deductions on the interest paid, you’ll need a valid interest certificate from your bank. If you don’t provide proper evidence the Department will deny your deduction claims, so keep those documents handy.

13. Ignoring the tax consequences of owning multiple properties

Taxation rules for owning multiple properties are a bit complicated. If you have more than one property, you must designate one as self-occupied property (SOP) for tax purposes. The remaining properties will be considered as let-out properties. The tax calculation on such properties is done based on the presumed rental income. Even if you don’t rent out your property, you must pay tax on the estimated rent you could earn if you rent them. Report all your properties and correctly designate them to avoid penalties.

14. Required submission for overseas holdings

It’s necessary to file ITR if you are holding any foreign assets, even if your income is below the basic exemption limit. One can use the ITR-2 form to report such assets, like details about foreign bank accounts, investments, properties, and stock options from foreign companies (ESOPs). The ITR-2 form requires you to disclose these assets under the Schedule Foreign Assets (FA) so that you can maintain transparency and avoid penalties for non-disclosure.

15. Failing to pay sufficient advance tax or self-assessment tax

If you earn an income that is not subject to TDS, you have to pay an advance tax or self-assessment tax. With advance tax, you have to assess your expected tax liability for the financial year and pay it in four instalments – June 15th, September 15th, December 15th, and March 15th before the end of the financial year. On the other hand, self-assessment tax is paid after the end of the financial year when you file your ITR to cover any tax that was not covered by TDS or advance tax. Not paying advance tax or self-assessment tax can result in penalties and interest.

16. Ignoring Profits from Transferring Mutual Funds

When you switch mutual fund units, it is considered a redemption of units in one fund and a purchase of units in another, so the capital gains from switching can go unreported as these transactions don’t appear directly in bank statements. These gains or losses should be reported in your ITR.

17. Submitting false or incorrect claims or documentation

If one submits false or incorrect documents to claim deductions or exemptions, it can lead to more than just fines. One might even be subject to legal action for tax evasion. The Income Tax Department can easily verify your documents to detect fraud, so being truthful can save you from some serious repercussions.

18. Not connecting PAN with bank accounts

All your bank accounts must be linked with your PAN to avoid issues with tax processing. It also helps in receiving your tax refunds smoothly. When your bank accounts are linked with your PAN, the Income Tax Department can easily process your refunds and credit them directly to your mentioned bank account.

19. Failing to submit necessary forms

Some exemptions require you to submit specific forms before filing your income tax return. For example, if you are claiming relief under Section 89 (1) for salary arrears, you need to submit Form 10E. If you don’t submit relevant forms, you might miss out on the tax benefits and face problems with the Income Tax Department.

20. Incorrectly assessing one’s living situation

In India, tax is charged based on the residential status of the individual rather than citizenship. The residential status, whether Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR), is determined every financial year at the time of tax filing. If you declare the incorrect residential status it can lead to incorrect tax calculations, penalties, and issues with the Income Tax Department.

21. Claims of incorrect deduction

The Income Tax Act provides many deductions that can reduce your taxable income, such as those under Sections 80C for certain investments, 80E for education loan interest, 80D for health insurance premiums, 80G for donations, and Section 24 (B) for home loan interest. Make sure that all the deductions you want to claim are valid, and that you have the necessary documents to support your claims. You also have to keep in mind that you can claim these deductions if you choose the old tax regime. While the new tax regime has lower tax rates, it doesn’t allow you to claim most of these deductions. 

If you are unsure about any aspect of your tax filing, don’t hesitate to seek guidance from a tax advisor. There are plenty of benefits tax advisors offer. They can make sure that your filing is timely and accurate, so you don’t have to worry about mistakes or compliance issues. They are well-versed in tax laws, so they can also inform you of ways to reduce your tax liability that you may not be familiar with. They can also assess your financial situation, goals, and risk tolerance and create a personalised tax plan that can help you save more of your hard-earned money year after year.