For salaried employees, filing an Income Tax Return (ITR) involves more than just Form 16, as tax authorities now access a wider range of financial data. This article outlines common filing errors, such as choosing the wrong tax regime, overclaiming deductions, and misreporting capital gains or foreign assets.
Since the majority of salary information and tax deductions are recorded on Form 16, which is provided by the employer, completing an income tax return (ITR) is typically viewed as a simple procedure for salaried employees. However, the income tax department now has access to a far larger set of financial data, including interest income, dividends, capital gains, high-value transactions, foreign remittances, and other reported data, thanks to the growing digitisation of tax reporting through Form 26AS, AIS (annual information statement), and TIS (taxpayer information summary). Therefore, tax notifications, increased tax responsibility, interest, and penalty risk may follow from even a minor discrepancy or omission in the return.
Employees may also face significant tax demands if they have moved employment, chosen the incorrect tax system, claimed deductions without sufficient documentation, neglected to disclose capital gains, or disregarded overseas assets. As a result, filing an ITR now necessitates a thorough reconciliation of all income, deductions, tax credits, and disclosures in order to guarantee that the return is correct and comprehensive, rather than being only a compliance requirement based solely on Form 16.
In this article, we give a quick summary of the typical errors that workers make when submitting income tax returns, which can have a big financial impact on taxpayers.
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More Needed Than Form 16
When submitting their ITR, many paid workers only use Form 16. Form 16 is a crucial document, however it often just records information provided by the employer on wage income and TDS (tax deducted at source). It might not accurately represent income from other sources, including dividends, capital gains, savings bank interest, fixed deposit (FD) interest, rental income, and income from consultancy or freelance work.
Therefore, before submitting the return, employees should reconcile Form 16 with Form 26AS, AIS, TIS, bank statements, capital gains statements, and investment records. Mismatch notifications and extra tax obligations may arise from failing to disclose income that appears on Form 26AS or AIS.
Selecting Wrong Tax Regime
When taxpayers choose the tax regime without doing a comparison calculation between the old regime and the new/concessional regime, a serious filing mistake may occur. The HRA exemption, the LTA exemption, the deduction for interest on self-occupied house property, and the deductions under Chapter VI-A, including Sections 80C, 80D, 80CCD(1B), etc., are among the exemptions and deductions that are restricted under the new tax regime, despite the fact that it offers concessional slab rates.
Therefore, after taking into account the salary structure, eligible exemptions, deductions, the employer's contribution to the National Pension System (NPS), standard deduction, home loan interest, investment-linked deductions, and other eligible claims, employees should assess their net tax liability under both regimes.
Additionally, employees should make sure that the regime selected in the ITR is in line with the applicable regulations for exercising such an option, especially when business income is involved, as the flexibility to switch regimes may be limited in such cases. For example, a taxpayer with income from a business or profession who has exercised the above option of shifting out of the new tax regime will only be able to exercise the option of opting back to the new tax regime once. Nonetheless, this choice will be available to additional taxpayers each year.
Overclaiming Deductions
Only when the taxpayer has made legitimate payments or investments within the allotted time frame may deductions under Sections 80C, 80D, 80CCD, 80G, and other applicable laws be claimed. Sometimes workers submit intended investments to the employer and claim deductions for them, but they don't really make the investment before the end of the fiscal year.
This might lead to an excessive deduction being claimed on the return, which could eventually result in a tax demand. Therefore, before claiming deductions, workers should confirm genuine payment receipts, insurance premium certificates, ELSS statements, provident fund contributions, house loan repayment certificates, and gift receipts.
Capital Gain Reporting Errors
Particular attention should be paid to capital gains reporting by employees who invest in shares, mutual funds (MFs), employee stock option plans (ESOPs), real estate, or other capital assets. The kind of asset, holding term, purchase cost, selling consideration, costs, and any exemptions must all be taken into account when calculating capital gains.
The right capital gains must be calculated and reported by the taxpayer on the return. Significant tax demands may arise from errors in reporting grandfathering advantages, indexation, short-term or long-term capital gains, cost of purchase, or exemption claims.
Incorrect Tax Treatment Of Additional Income
Workers who get bonuses, arrears, advance salaries, joining bonuses, retention bonuses, severance pay, VRS compensation, or retirement benefits should assess how these items should be treated tax-wise. Depending on the type of payment, it might be taxable under a separate item of income, entirely taxable, partially exempt, or eligible for relief under Section 89.
Non-Disclosure of Foreign Assets
Foreign assets and foreign income must be disclosed in the ITRs of resident and normally resident workers. Foreign bank accounts, foreign shares, foreign ESOPs, retirement accounts, financial stakes in international companies, and signature authority in foreign accounts are a few examples of this. When it comes to international ESOPs or RSUs, employees who work for global corporations, start-ups, or foreign group organisations should exercise extra caution. Disclosure requirements may still be applicable even in cases where the income is not taxable in India for a given year.
Inaccurate Bank Details
Refunds may be delayed by inaccurate bank account information, non-prevalidation of a bank account, or a mismatch in PAN-bank connection. Workers should confirm that the bank account they have chosen for the return is current, pre-validated, and connected to PAN. Before submitting the income tax return (ITR), they should also confirm the account type, account number, and IFSC.
Failure To Verify ITR On Time
The last step is not to file the return. Additionally, the return must be validated within the allotted time frame using Aadhaar OTP, net banking, a demat account, bank account validation, or, if necessary, a signed ITR-V. The return can be deemed void if it is not promptly validated.
