While certain types of income are exempt from tax, it is important for a taxpayer to disclose such income his tax return. Not disclosing the exempt income in the income tax return (ITR) could make it difficult for a taxpayer to explain the source of a particular income in future.
Let’s understand what exempted income is?
Some of the incomes which are exempted from income tax, are receipts from statutory provident fund, public provident fund, superannuation funds, scholarship received for completing education and interest earned from postal savings accounts up to ₹3,500 in a financial year.
Dividend income received from domestic companies was also tax exempt till ₹10 lakh. “However, dividend income now is taxable in the hands of investors but till last financial year that is for the financial year 2019-20 (for which the last date for filing tax return is 31 December) dividend income from domestic companies were exempt from tax up to a certain limit,” said Prakash Hegde, Bengaluru-based chartered accountant. Also, many taxpayers also get confused about dividends received from foreign companies. It is not exempt from tax and has to be disclosed under other income,” Hegde added.
Also, if there is any exempt income due treaty between India and another country, it has to be reported in the income tax return.
Gifts received from close relatives such as husband and wife, father and son etc as defined by the tax department is tax exempt. But it will be better to disclose such gifts in the income tax return to provide for future reference.
For example, if a person has received a gift of ₹25 lakh from a close relative and the person has not filed an income tax return or showed the same in the tax return, if he or she buys an asset using the same money. It will be reported to the tax department by the seller of the asset. “It will be easier for the person to explain the source in case the same was reported in the ITR,” said Hegde.
In case the person is not able to explain the source a penalty may be charged by the tax department.
“Unexplained income is taxable at the rate of 60% plus penalty,” said Hegde.