As an Indian taxpayer it is very essential that you file your tax returns carefully. To understand the most common tax filing errors typical taxpayers make, you could refer to our article. But despite your best efforts, there can be certain situations because of which you receive a notice from the Income Tax Department. The notice might inform you that you are under scrutiny. Make sure you have the necessary paperwork in place when filing your return to explain your situation. Also keep these possibilities in mind.

Sharp Drop in Your Declared Income

If you are a businessperson or trader running your own business, there is always the chance that your profit levels vary from year to year. For instance, one year you might declare a profit of say, above ₹20 lacs and pay your taxes accordingly. The following year, you might disclose an income of just ₹16lacs. But if these figures drop suddenly to say, ₹5 lacs, the IT department might investigate your papers to verify the situation. It is not essential that you have done anything wrong but you should be prepared. Usually people earning a fixed salary might not face this issue.

Transactions of Large Amounts

If you have conducted transactions involving large amounts of cash, the IT department could check you out. Large transactions must be reported by the various companies to the IT department under the Annual Information Returns. Thus, if you have credit card bills of over ₹2 Lacs per year or if you have invested over ₹2 Lacs in Mutual Funds, you could get checked. Banks must also report deposits of over ₹10 Lacs in your bank account or over ₹5 lacs in Fixed Deposits. Further, if you buy stock assets of more than ₹ 1 Lac or buy or sell property valued at more than ₹30 Lacs, the department might check to see if you have duly reported it.

Omissions of Income

There is always a chance that you have unknowingly omitted the mention of certain earnings. For example, capital gains on stocks and bonds, interest on fixed deposits or rent from fixed property. The IT department can track all your taxable, short-term capital gains on your stock. This is because you need to submit your PAN to open a demat account and pay the mandatory securities transaction tax. Then again, your stock broking company might also mention your transactions in their returns. Banks also disclose all necessary information. Do remember that if you don’t disclose an income, you have to pay a penalty of 100% to 300% of the payable tax. For instance, if you owe taxes of ₹10,000, you might have to pay a penalty of ₹10,000 to ₹30,000 in addition to the tax.

Investing in the Name of Your Family

Investing your money in the name of your family members can help you save on taxes. However, it is necessary that you disclose these investments to the IT department. You must also provide the relevant paperwork to prove that the earnings from these investments are not yours. You could use channels like fixed deposits, fixed property like land and buildings, stock and mutual funds or post office schemes. However, if you’re investing in the name of your spouse, daughter-in-law or minor child, you must add the income earned in your tax return. According to Section 64 of the Income Tax Act, these earnings are clubbed along with yours. To avoid this situation, you must prove that you made these investments in return for some consideration and the earnings now belong to investment holder.

Mistakes and Errors in Tax Returns

There are many common errors you can make that can earn you a notice under Section 143 (1). This can be because of calculation mistakes, or deducting more amounts than the acceptable limit. You might have also claimed an exemption that you are not entitled to or you might have made other errors in filing your return. The IT department informs you of the variations in your return and their calculations by way of this notice.

But, being forewarned is being forearmed. Keep these factors in mind and make sure you avoid them when filing your income tax. Thus, you will be able to avoid the possibility of receiving a notice.

To read more informative articles on income tax, please visit: Lending Chaupal Tax Resources

For or  more information on income tax notices, please read the following articles:

  1. http://www.jagoinvestor.com/2014/11/9-things-to-avoid-if-you-want-to-avoid-income-tax-scrutiny.html
  2. http://profit.ndtv.com/news/your-money/article-what-to-do-when-you-get-an-income-tax-notice-322277
  3. http://www.taxscoop.in/entries/general/do-you-know-why-you-can-expect-an-income-tax-scrutiny-notice-
  4. https://in.finance.yahoo.com/news/guide-handle-notices-income-tax-104104108.html?page=all