Your bank and Credit Card Company supposed to report income tax department if your expenses or cash withdrawals exceed certain limits. Similarly, investments by an individual cross certain thresholds limit like Rs.1 lakh in stocks, Rs.2 lakh in a mutual fund, in bonds over Rs.5 lakh
It is quite common that some tax payers invest their money in Shares or Fixed Deposits or other Assets in the name of non-working spouse to avoid tax. As per the provisions of Section 60 to 64 of Income Tax Act, revenue/interest earned on such investments is considered as your own income and taxed at slab rates applicable to you. This is because a person cannot divert his income to any other person and say that it is not his income. Inclusion of others Incomes in the income of the assesse is called Clubbing of Income and the income which is so included is called Deemed Income.
The rules are slightly different in case of investments in the name of minor children (below 18 years). The earnings are treated as the income of the parent who earns more. However, interest earned up to Rs.1500 a year per child up to a maximum of two children is exempted from tax payment.
The gifts made to a spouse or a minor child does not attract tax. However, if that money is invested and income generated from such gift shall be clubbed with the income of the giver and taxed accordingly. Similarly, if you buy a house in your wife’s name, any income from that house, whether as capital gains when you sell it or as rent, will be treated as your income and you are liable to pay tax for the deemed income irrespective of spouse’s income is below the basic exemption.
Many people make a common mistake that they do not report interest income up to Rs.10000/- in ITR believing that interest income of up to Rs.10,000 a year is tax free. In reality, the tax exemption of Rs.10000/- a year under Sec 80TTA applies only to the interest earned on the balance in a savings bank account. Interest earned from all other sources like fixed deposits, recurring deposits and even tax saving bank deposits and infrastructure bonds is fully taxable.
Another common mistake is many senior citizens do not show interest earned from savings bank account along with deposit interest in the ITR believing that they are eligible for tax rebate up to Rs.10000/- under section 80 TTA. Actually, Senior citizens who have received deposit interest (including SB and Recurring Deposits interest) up to Rs.50000/- in a financial year are exempted from tax under Sec.80TTB. With the introduction of Sec 80 TTB, Sec 80 TTA will not be applicable to Senior Citizens –i.e. SB interest exemption of Rs.10, 000/- is not separately available to senior citizens.
If you buy a house on loan, the principal portion of the EMI paid up to Rs.1.50 lakh for the financial year is allowed as a deduction under Section 80C of IT act. But to claim this deduction, the house property should not be sold within 5 years of possession. Otherwise, the deduction claimed earlier will be added back to your income in the year of sale. It is riskier to keep the transaction under wraps because the buyer may seek tax benefits on the same property, therefore tax people may catch you if you have not reported the same.
In the same way, if you have ended a life insurance policy within three years of purchase, any tax deduction claimed earlier will be added back to your income in the year the policy is foreclosed.
If your total income is below the taxable limit, (tax on you total income is nil) you can submit Form 15G (person below the age of 60 years) or 15H (senior citizen) to the bank requesting the bank not to deduct any TDS. Many investors try to avoid TDS by splitting their investments across different banks or submit Form 15G or 15H so that their bank does not deduct TDS. If TDS is not deducted because the person has filed Form 15G or 15H, it is separately shown in part A1 of the Form 26AS. Misuse of these forms is a serious offence. A false declaration not only attracts penalty, the declarant can be sentenced to jail for terms ranging from three months to two years.
