As the last day for filing your income tax returns approaches, you start a mad rush for various tax-saving investments. However, it is best to start getting everything in order so that you can beat the stress that comes with last-minute changes to your IT returns. Quite a few things have changed from April 1, 2020. For example, there are two tax regimes to choose from, and dividend income is now taxable. And remember that a simple oversight could lead to under-reporting of income for the year and possibly a notice from the tax authorities.
There's no reason to worry, though. Here is a list of incomes that need to be reported.
Mutual Funds
From 2020 onwards, dividend from mutual funds is taxable in the hands of the taxpayer. This is one of the biggest changes to have been announced in Union Budget 2020. Until last year, mutual funds dividends of up to Rs. 10 lakh were tax-exempt for investors. Mutual fund companies paid Dividend Distribution Tax (DDT) to the tune of 15%. However, this has now been abolished. Dividend payments will have to be added to an individual's income and taxed according to the respective slab you fall under. TDS is also applicable if the dividend earned is more than Rs.5000 in a given financial year.
If you have switched mutual funds in the past year, you should give detailed information regarding changing schemes when filing the ITR and give details of the benefits you received.
Note that the income tax authorities can send you a notice under section 148 of the Income Tax Act if they feel you have not furnished the complete details.
Notional Rent
There is also something called ‘notional rental’ for a property, which is an assumed amount that you would expect to earn if you let out an unoccupied property that you own. It is based on the property value, fair rent (of a similar property), municipal value (rent determined by the municipal board of the area), and standard rent (fixed under an applicable Rent Control Act, where such a law applies).
Under India’s income-tax rules, notional rent will come into play if you own three residential properties and have not let out one; the unoccupied property will be deemed let out, and the “rent” taxed. This means your ITR will have to reflect this fact.
You can claim a standard deduction of 30% of the annual notional rent amount under Section 24 of the Income Tax Act, which will bring down your taxable income. The exemption is granted because you have expenses on maintenance of the property.
If you have a Housing Loan on that property, don’t forget to mention it too; you tax liability will be brought down further.
Public Provident Fund (PPF)
PPF falls under the Exempt-Exempt-Exempt (EEE) category, which means any deposit in your PPF is deductible under Section 80C of the Income Tax Act. The accumulated amount and interest are also exempt from tax at the time of withdrawal. So, remember to mention your PPF investments in your ITR. However, please note that any withdrawal before completing five years of service- either with the same or a different employer- is tax-deductible, subject to certain conditions.
Employee Provident Fund (EPF)
'Pandemic' has been added to the list of permissible reasons for pre-mature withdrawal of up to 75% of EPF balance. In this case, tax is not applicable even if you haven't completed five years of service. The exception has been made to alleviate any financial difficulties arising from a salary cut or job loss. However, it will need to be shown under Section 10(12) Recognised Provident Fund, just like PPF.
Here's something that you should also pay attention to. In Budget 2020, the government capped investments in retirement instruments like PF, National Pension Scheme (NPS) and superannuation fund at a combined Rs.7.5 lakh. Employer contributions above this sum are now chargeable in your hands. Budget 2021 has introduced new changes. For example, interest earned on EPF contributions above the statutory limit of Rs 2.5 lakh per year will now be taxable. It will be assessed based on the income tax slab you fall into. However, Voluntary Provident Fund (VPF) contributions by public-sector employees are exempt to a maximum limit of Rs 5 lakh. This is because, in the case of VPF, there is no contribution from the employer. Declaring interest income from these sources is thus critical.
Life Insurance
Adequate life insurance coverage has become a necessity in the post-pandemic environment. Upgrading your health cover is also the need of the hour. A combination of health insurance family floater and critical illness plans can provide a financial cushion in case of a health emergency. From the tax standpoint, any money you may have received on account of a maturing life insurance policy also needs to be included. In the case of a surrendered policy, the surrender value should be included. Income from life insurance is tax-exempt except under certain conditions.
Income from ULIPs
Budget 2021 has brought about changes in how ULIPs are taxed. If you paid a premium of Rs. 2.5 lakh or more in the last financial year, the ULIP in question is taxable on maturity. However, the sum of Rs. 2.5 lakh is an aggregate or combined value. Remember, this rule will only apply to ULIPs issued on or after 1ST Feb 2021.
Other sources
Apart from your regular salary and income from residential property, you are required to report any other incomes such as interest on bank deposits.
These incomes, in addition to a few others such as dividend income and earnings from renting out plant and machinery, have been clubbed by the income tax department under a separate head called ‘Income from Other Sources’; even gifts, minor’s income, and interest earned on income-tax refunds are listed under this head.
For many, the most common ‘other sources’ of income is interest earnings from our Savings Bank Accounts and Fixed Deposits (FD). For senior citizens, there may also be income from pension or annuity. The interest earned on Savings Bank Accounts and FDs becomes taxable if it exceeds Rs 1,000. But even it is lower than this limit; it is better to mention it when filing the ITR as then you can claim it under Section 80 TTA of the Income-Tax Act, which provides a deduction of Rs 10,000 on interest income.
It is also erroneous to think that there is no need to mention interest earnings as banks have deducted tax (TDS) on them because it can bring a difference in the tax rate.
Gifts and benefits
If anyone has lovingly gifted you something valuable, maybe even cash, do not make the mistake of thinking it is exempt from tax; it is not under the Income-Tax Act (unless they fall in the exemption category), and you will have to disclose it your ITR and pay the necessary taxes on them.
Gifts for tax consideration fall in two categories: those from one’s employer and those from others. Employers’ gifts are exempt from tax if they are worth less than Rs 5,000 and considered as perks under the head ‘Income from Salary’.
However, gifts received from anyone else come under provisions of Section 56 of the Income-Tax Act, which relate to ‘Income from Other Sources’, provided they don’t fall in the exempt categories, i.e. if they are received from specified relatives (close family members) or on specified occasions (weddings, inheritance etc.).
Such gifts can be either in cash and/ or moveable and immoveable property. Cash gifts not in the exempted category will be taxed on the amount exceeding Rs 50,000.
Similarly, immovable property like real estate gifted without consideration (i.e. free) will be taxed on its stamp duty, provided this amount is more than Rs 50,000. Sometimes, such property can be transferred given at a nominal consideration; this too is taxable. A similar tax formula is applied for moveable properties like jewellery and paintings.
Income of minors
This could be relevant for you if you have kids because you can be taxed for any income accruing to them. This situation arises because it is not uncommon for minors (age below 18 years) to receive monetary gifts, maybe even from parents.
If these amounts are deposited in a bank (Savings Bank Account, FDs) or invested, there will be an income. If this income exceeds Rs 1,500 in one financial year, it will be clubbed with the income of the minor’s parents under Section 64 (1A) of the Income Tax Act.
If you are the parent of such an ‘earning’ minor, you should be aware of the likely scenarios (for ITR purposes):
If you are the sole earner (i.e. not your spouse), the minor’s income is clubbed with yours.
If both you and your spouse have an income, the minor’s income will be clubbed with yours only if you earn more than your spouse.
If you are divorced and have custody of the minor, the minor’s income will be clubbed with yours (if your ex has the custody, you have no liability in this respect).
The minor’s income will have to be shown under the head ‘Income from Other Sources’ and if exempted (i.e. income below Rs 1,500) will be shown under ‘Exempted Income’.
Incidentally, if the minor has a disability (specified under Section 80U of the Income Tax Act), his or her income will not be clubbed with your income or that of your spouse.
Income from Income Tax Refund (ITR)
As you know, the ITR is a consolidated statement of your income, tax payable, liabilities – and tax refunds, from the previous year’s tax returns. So, in case you received some tax refund this financial year, don’t forget to mention it in your ITR. Remember, you will also get some interest, calculated at 0.5% per month from April 1 of assessment year till the date of grant of refund.
If you are an HDFC Bank customer, you can e-file with three easy steps, as shown below:
STEP 1: Log in to NetBanking using your NetBanking ID and password
STEP 2: Click on the ‘Offers’ tab
STEP 3: Click on the banner ‘Free e-filing of Income Tax’ and proceed with the filing
You can read more on Tax Planning Guide here.
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* The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.