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August 24, 2020

10 Ignored Incomes or Receipts Taxpayers Fail to Disclose in ITR

by CA Shivam Jaiswal in Income Tax

10 Ignored Incomes or Receipts Taxpayers Fail to Disclose in ITR

There are several types of income which are often ignored by taxpayers while filing their income tax returns. This may happen because they are unaware of the taxability of such income or because they knowingly hide it from the tax authorities.

Therefore, it is important to understand what incomes should be disclosed in the ITR. Not declaring such income leads to tax evasion and could fetch a notice from the tax department.

Things can become more serious if the undeclared income is substantial and tax has not been paid on it. The taxpayer could then be slapped with a late payment penalty. 

1. Gifts

Aggregate value of gifts received without consideration during a financial year (FY) would be taxable as other income in the hands of the recipient. However, if the aggregate value of such gifts is less than Rs 50,000, then it would be exempt from tax. 

For instance, if an individual receives gifts worth Rs 85,000 in a tax year, then he is required to pay tax on the full amount and the same will have to be adequately disclosed in the ITR.

However, he will not be liable to pay tax if the aggregate value of gifts is less than Rs 50,000.  Also, any gift you receive from a person who qualifies as a relative under the Income Tax laws is exempt from tax.

2. Bank Interest Income

Interest income from Fixed Deposits is taxable. It is covered under the head ‘Income from Other Sources’ in your Income Tax Return.

Senior citizens receiving interest income from FDs, savings account and recurring deposits can avail income tax exemption of up to Rs 50,000 annually under Section 80 TTB. Section 80TTA provides a deduction of Rs 10,000 on interest income. This deduction is available to an Individual and HUF. This deduction is allowed on interest earned 

  • From a savings account with a bank
  • From a savings account with a co-operative society carrying on the business of banking
  • From a savings account with a post office

Some of the confusion here is due to the tax relief extended to bank interest. Interest exceeding the above threshold limit is subject to tax. Small taxpayers generally will not hit that threshold of exempt income. However, if this limit is breached, this income too has to be reported. 

3. Clubbed Income of minor child

The income of minor child will be clubbed in the income of that parent (mother/father) whose total income is greater.

Where the minor child’s income has been clubbed in the total income of his/her parent, such parent will be entitled to an exemption to the extent of such income or Rs. 1,500 whichever is less, in respect of each minor child whose income is so included.

However, where the income of any minor is less than Rupees 1500 then the aforesaid exemption shall be restricted to the income so included in the total income of the individual. Therefore one should not forget to include their minor child’s income in their ITR wherever applicable

4. Clubbed income of HUF/Wife

If your spouse receives any remuneration such as Salary, commission, fees or any other form and by any mode i.e., cash or in kind from any concern in which you have substantial interest, then income shall be clubbed in the hands of the taxpayer or spouse, whose income is greater (before clubbing). Clubbing is not attracted if spouse possesses technical or professional qualifications in relation to any income arising to the spouse and such income is solely attributable to the application of his/her technical or professional knowledge and experience.

In case, a member of HUF transfers his individual property to HUF for inadequate consideration or converts such property into HUF property, then income from such converted property shall be clubbed in the hands of individual.

Therefore one should not forget to include their spouse’s of HUF’s income in their ITR wherever applicable

5. Foreign exempt interest income in NRE account of NRI

Individuals who are not residing in India usually have a Non-Resident External (NRE) bank account in India to invest their foreign earnings. An NRE account is an Indian Rupee (INR)-denominated account which can be in the form of savings, current, or fixed deposits.

If the individual is returning to India, he/she has to convert his/her NRE account to a resident savings account or to a RFC – Resident Foreign Currency account. The individual can continue to hold the NRE account if he/she has received permission from the RBI to do so.

As per section 10(4)(ii) of the Act, the NRE interest is exempt from tax for those who are treated as a ‘Person Resident Outside India (PROI) as per the Foreign Exchange Management Act, 1999 (FEMA) or if the person is permitted to continue holding such an account by the RBI.

In other words, NRE interest is taxable for a person who qualifies as a Person Resident in India (PRI) as per FEMA and does not have permission from the RBI to maintain it.

If a person qualifies as a PRI as per FEMA, he/she cannot avail the exemption under section 10(4)(ii) of the Act and the NRE interest income earned for the entire year shall become taxable till the time the account is operational. Such income should be adequately disclosed in the ITR.

6. Capital Gain on Sale of Gold/Silver or Art Items

Personal effects of a person, such as movable property including wearing apparels and furniture held for personal use, by a person or for use by any member of his family dependent on him are excluded from the definition of capital assets and hence no capital

However, jewellery, archeological collections, drawings, paintings, sculptures, or any work of art are not treated as personal effects and, hence, are included in the definition of capital assets and any profit or gain arising from transfer of such capital assets during the year will be charged to tax under the head “Capital Gains”.​ One should take utmost care to report such gains in their ITR.

7. Interest on loan given to friends or family

One should make sure that they are aware of all the tax implications related to lending loans to family members are friends. For family members, there are no tax implications of gifts and loans of any kind or amount. However, any non-relative, or friend, can give you a gift of up to Rs. 50,000 only and gifts above that are taxable.

But, if you provide friends with a loan of any amount (interest-free or with interest), it becomes tax-free. If you are charging your friend or family member interest on the loan, no matter how nominal, it will be considered as a part of taxable income, as income from other sources and the same should be disclosed in the ITR.

8. Dealings in stock exchanges

Many people have interest in stock markets and they casually do intra-day trading or invest in stocks in small amounts, resulting into gains or losses. As they deal in small quantities in a casual manner and the net short-term capital gain (STCG) and/or long-term capital gain (LTCG) is not very significant compared to their salary, such tax payers, at the time of e-filing of ITR, often ignore to mention these transactions in their ITR.

Income from shares can be from investments, intra-day trading, normal trading or derivative trading. It should be kept in mind that be it significant or insignificant, gain or loss, a person involved in transaction of securities must disclose it in his/her ITR, provided the total income exceeds the tax-free limit in a financial year.

If a person wants to carry forward the unadjusted capital loss, or to bring forward such a loss from the previous year, filing of ITR will be necessary.

9. Winnings from lotteries, horse races, gambling etc

Any income that you get from winning lotteries, crossword puzzles, horse races and card games, gambling, betting or even game shows are chargeable to tax and fall under the category of income from other sources. These incomes are fully taxable and they are taxed @ 30%. It is extremely important to disclose such winnings in their ITR’s.

10. Pension received by legal heirs of deceased

Any pension received by legal heirs of deceased is taxable for them. However, this income isn’t fully taxable. They can claim a deduction at 1/3rd of such income or Rs 15,000, whichever is less. Family members who are earning pension will have to report the same under ‘Any other income earned’ in the other sources schedule in ITR 2. 

One must always remember that there is penalty for under section 270A of the Income Tax Act for under-reporting and misreporting of income that can be imposed by the Assessing Officer / the Commissioner (Appeals) / the Principal Commissioner / the Commissioner. The penalty amount under section 270A increases in case the under-reported income is in consequence of any misreporting. The cases of such misreporting income shall be following –

  • Misrepresentation / suppression of facts.
  • Claim of expenses not supported by any proofs.
  • Failure to record investments in the books of accounts.
  • Failure to record receipt, affecting the total income, in the books of accounts.
  • Failure to record an international transaction / transaction deemed to be an international transaction / specified domestic transaction to which provisions of Chapter X apply.
  • Recording of false entry in the books of accounts.

Hence to avoid notice and penalties from the Income Tax Department you should file your ITR on times disclosing all your necessary incomes/receipts.

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