Here’s why It is important that you should report tax exempt income while filing ITR

Finance

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?

There are various types of income that are exempt under various sections of the income tax act. There is a schedule called Exempt Income (EI) in the tax forms where you need to give details of exempt income.
“This is necessary to match with form 26AS details being collected from various sources by the income tax department. In case you have done a high value transaction using the exempt income the same will be reported to the tax department but as you had not reported it in your tax return, the tax department may ask for the source of income to acquire the asset,” said Sudhir Kaushik, CEO, Taxspanner.com an online tax filing portal.

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.

Exempt income of minor children which has to be clubbed in the income tax return of either of the parents also needs to be reported in the income tax return.

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.

 

 

 

 

 

Source- livemint

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