[TAXSCAN 360] Busting 6 Income Tax Myths and Misconceptions in India

From Kingdoms to governments Taxation is an integral part of the growth of every country. Along with the growth of Taxation and related rules grew the misinterpretation about Taxes
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Every year citizens of India pay Income Tax for the Annual Income and profits earned by a person or entity during a financial year starting from the 1st of April to the 31st of March of the consecutive year.

According to the latest data, 66.5 million individuals pay personal tax which is 4.8% of the total population of the world’s most populated country. Recently DGGI has flagged a 46% surge in Goods and Services Tax evasion cases, totalling Rs 1.98 Trillion in 2023. The high Tax evasion rate of the country is due to Misconceptions and a lack of proper knowledge regarding the Tax Laws.

A very well-spread myth about taxation was that there would not be any penalty if the taxes were not being paid on time, but that is not the fact, the Income Tax (IT) Department has the right to freeze the accounts and impose heavy penalties on the Tax Evasion.

So in this article, we are going to throw some light on the common Myths and Misconceptions associated with tax.

MYTH: Gifts are 100% Tax-free.

FACT: At first, the common myth or misconception about the gift was that they were 100% tax-free. But that’s not the truth, even the gifts can also be taxed. For instance, gifts received from specific relatives during weddings cannot be taxed, and they don’t have an upper limit. However, the gifts received from non-relatives are taxable in certain situations.

The tax laws related to Gifts were primarily dealt with by the Gift Tax Act, of 1958 but later on it was repealed and it was bought under the Income Tax Act of 1961. According to the act the Gifts received from certain relatives – Father, Mother, brother, and sister are exempted from tax liabilities and the monetary limits are not applicable here.

But in the case of the non-relatives if the valuation of the gift is higher than Rs. 50,000 then the gifts received can be taxed. For instance, if Mr.W received a wedding gift worth Rs. 70,000 from his father, that will be 100% tax-free but the gift received by Mr.W from a friend worth 40,000 rupees and another friend gifted him a gift worth Rs. 30,000 then the total valuation of the gift shall be considered, i.e, 70,000 rupees which is taxable. But if the person earns any profit out of the gift provided by the relatives, then that particular gift will be taxed.

For instance if a person is being gifted an amount of Rs.7,00,000 by his relative on the occasion of his/her marriage, then that particular amount would not be taxed but if the amount is being invested as an FD, then the interest received from the particular FD will be subject to Tax.

If the Movable or Immovable Property received by some person has the difference between the Actual Value and the Stamp Value then, that particular difference will be considered a taxable gift.

If a property or amount is being gifted by a local authority it will be considered tax-free. The local authority should come under the provision of section 10(20) of the Income Tax Act of 1961.

The Gifts received by the recipient during marriage are 100% Tax-free.

Read More: How to Ensure Cash Gifts from Parents and Relatives Won’t Land you in Tax Trouble

The Gift received from any trust, or institution which comes under the definition of Section 10(23) or the registered trust or institution under Section 12AA of the Income Tax Act are also tax-free.

MYTH: Deductions from Income from House Property can be availed only on a single housing loan.

FACT: Certain Tax Benefits can be availed by the taxpayers under Section 24 of the Income Tax Act of 1961, under the head of ‘Deductions from Income from House Property’.The Tax benefits are categorized into two heads, Interest and Principal.

Interest related: It is a common misconception that taxpayers can only avail of the tax benefits upon the interest paid on a single housing loan from a house but that’s not the scenario a person can have more than one home loan and can also avail of tax deductions on those loans. Tax deductions up to 2 lakhs can be availed by the taxpayers each financial year upon this head. These tax deductions can only be availed if :

  1. The loan must be taken on or after 1st April 1999.
  2. The loan must be availed for the purchase or construction of a property.
  3. The purchase or construction must be completed within 5 years from the end of the financial year from which the loan is taken.

Scenarios in which deductions cannot be availed:

  1. If a person owns two houses then one house will be considered self occupied and the other will be considered let out according to the choice of the person. So the Gross Annual Value ( Reasonable Rent of a Similar Place ) of the Self Occupied house will be considered Nil and even be negative if the interest is being paid for the particular house loan and the rent of the other house will be taxed but will be eligible for deduction according to Section 80C.

Principal related: Section 80C relates to various tax deductions related to the principal amount of the Home Loan. To avail of this deduction, the construction has to be already done and it has to be a residential property. A maximum deduction limit is 1.5 lakhs per year from the Gross Annual Income.

Old Tax Regime vs New Tax Regime

According to the Old Tax Regime, a Deduction of 2 lakh rupees can be availed for both Self Occupied and Rented Properties if the interest is being paid for the loan.

However, according to the New Tax Regime, deductions cannot be claimed for the interest paid on the loan taken for the construction or purchase of a Self occupied House. While the case of Rented House remains the same.

According to the Old Tax Regime, a deduction of 1.5 Lakhs rupees can be claimed upon the principal amount under Section 80C.

But no deductions can be claimed according to the New Tax Regime upon the principal amount.

MYTH: Income Tax filing is not Necessary for Interest Earned. The interest earned from a Bank Savings Account, or post office savings account is not taxable.

FACT: It is a common myth that tax filing is not necessary for interest income, but that is just a myth. In reality, this income from the interest must be categorized into ‘ Income from other sources ‘ and is taxable.

But certain deductions can be availed under Section 80TTA of the Income Tax Act of 1961 upon the interest earned from the Bank Savings Account, Post office savings account, and cooperative society. A maximum Deduction of Rupees 10,000 can be availed upon the Gross Annual Income of an Individual, HUF ( Hindu Undivided Family), and NRI (Non-Resident Individual ) with an NRO Account in India. But if the interest from the savings account is less than 10,000 Rupees then the whole amount will be considered as a deduction.

Exceptions for deductions 

  1. Interest from Fixed Deposits and Recurring Deposits.

However Senior Citizens cannot avail this deductions mentioned in Section 80TTA , but they could avail a deduction of Rs,50,000 or the interest earned as income,whichever is lesser, upon the interest earned from the Savings or Fixed Bank Deposits, Deposits on Co-Operative Societies and Post Office Deposits according to Section 80TTB of Income Tax Act of 1961.

According to the New Tax Regime, the deductions under Section 80TTA of The Income Tax Act of 1961 cannot be availed.

MYTH: Charity Donations do not have any Tax Benefits

FACTS: Charity donations will not attract any tax deductions that’s a myth that has been in the public domain. But that’s not the fact. Section 80G of the Income Tax Act deals with the deduction of the tax upon the contribution to specific relief funds such as the PM Disaster Management Fund or Specified Institutions.Should make sure that the Fund to which the donations are made are eligible for the deductions under 80G.The Rate of deduction varies from 50 – 100 % depending upon the choice of trust to which the donation is made. Inorder to avail relief under 80G the taxpayer has to obtain a 80G certificate or donation certificate from the institution to which the donations are made.

Individuals, Companies, and HUF, NRI’s can make donations through the following ways: Cheque, Demand Draft, and Cash. Donations made to Foreign Organisations are not eligible for donations.

Myth: You Don’t have to file Returns if you Don’t Owe Any Tax

Fact: The Taxpayers have to file the ITR regardless of whether they owe the taxes or not. This varies according to the various slab rates that keep on changing according to the age group of the taxpayers and the Tax Regime opted by the Taxpayers. So if the Gross Annual Income of the individual exceeds the basic exemption limit then, it will be compulsory to file the Tax.

According to the Old Tax Regime, Individuals and HUF below 60 years and NRIs can have a basic tax exemption of up to Rs 2,50,000, Super senior citizens aged above 80 years can avail basic tax exemption of up to 5,00,000. However, according to the New Tax Regime, the basic exemption limit is up to Rs 3,00,000 for Individuals, HUF on all age categories. So filing Taxes is very important as failure in filing may attract penalties and cause you to face issues while getting loans, Claim tax refunds, and Visa Approvals.

MYTH: My refund from the Income Tax department is delayed because of my Chartered Accountant/Tax Lawyer

FACT CHECK: The Tax professionals only file your Tax returns on your behalf with utmost care and caution. After filling the income tax returns it will be further handled by the respective Income tax department of our country. After filing the tax returns the tax professionals do not have any role in delaying or speeding up the refund, if you file the returns early, then the refund will be initiated quickly. But there are certain factors which may delay the refund process. Those are

  1. Error or Change in the Bank account details.
  2. Mismatch in the PAN details.
  3. Physical filling, and time required for the paperwork.
  4. Technical Issues from the Bank to which the refund is initiated.
  5. If the Bank account is not pre-validated.

Read Also: ITR Refund Still not Credited? Know how to Check Income Tax Refund Status

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