Monday, 27 February 2012

Do you know that you are evading tax?

Many people in this world, particularly in India, deliberately evade taxes a lot. But do you know some taxpayers are evading tax without their knowledge? Because, of this many taxpayers who consider that they are paying their taxes correctly on time may be liable to pay penalties and may face some other problems. In a recently conducted survey, it is found that many salaried employees or not reporting any other income apart from their salary income. Definitely most of the people should be having some other sources of income. Everyone will be having a savings bank account, but many are not reporting the interest from savings bank in their IT return.
Now let us see how you may be evading tax without your knowledge
1.      Interest earned from investments and deposits

Nowadays banks are offering an interest rate of 4% (recently some banks have raised it to 6% subject to certain conditions) in your savings bank account. Not only savings bank account interest, but interest earned from fixed deposits, Recurring deposits, infrastructure bonds and/or National Savings Certificate should be reported under the head “Income from other sources”. Whether you are getting the interest on cumulative basis or after maturity, interest income will be taxed on accrual basis. Banks and financial institutions will deduct a TDS of 10% on your investments or deposits. You cannot say that the bank has deducted TDS already, so there is no need for me to report the income. What if you fall in a higher tax bracket of 20% or 30%? You may become liable to pay more tax.

2.      Terminating your life insurance policy before 3 years

Most of the tax payers are thinking that they will lose only the premium amount paid for the life insurance policy if they terminate it before 3 years. But the real scenario is, you are not only losing the premium amount but also you have to pay tax for the amount deducted under section 80C during the previous years. Just calculate the tax to be paid by you if you fall in this category. Many insurance policies are terminated before three years.

3.      Selling your house within 5 years – if it is purchased on  a loan

If you are selling the house within 5 years (if it is bought on a loan), you will be losing the benefits acquired under section 80C – repayment of principal of the loan- during the previous years and you have to pay tax for that amount as well. It is the responsibility of the taxpayer to pay the tax exactly and he cannot escape from it.

4.      Never exclude the income of spouses and kids even by mistake

Almost all the taxpayers will be investing some amount in the name of their spouses or kids. But when you invest like that, the interest or income earned from that investment will be clubbed with the taxpayer (who is making the deposit in spouse’s name) income.
For example, if you have bought a home in your spouse’s name or made a deposit in your spouse’s name, the capital gain or rent will be included in the taxpayer’s income and will be taxed accordingly.
If your child is a minor, the income earned by that minor will be clubbed with the income of the parent who earns more.  So to avoid this clubbing provision, invest in tax free bonds or tax free investments.

5.      Wealth tax evasion

For the computation of wealth tax, the following items are included:
Arts and Artifacts +
Luxury cars, watches, aircraft and yachts+
Cash in excess of Rs.50000+
Second house lying vacant+
Finally, gold ornaments (but gold ETFs are not included).

When the amount computed exceeds Rs.30 lakhs, you have to pay tax at the rate of 1% for the excess amount. Penalty for evading wealth tax will be from 100% to 500% of the tax evasion amount. Under the Direct tax code, it is going to be more severe, the penalty may include a period of imprisonment ranging from 3 months to 7 years depending on the case circumstances.

6.      Wealth Tax Evasion regarding –  Second House property (Vacant)

If you have a vacant second house property, then also you have to pay wealth tax on it. But you are the given the concession of reducing the loan amount outstanding against the property from the market value of the property and wealth tax will be calculated on the remaining amount. But if you let out your second house property for 300 days in a financial year, you need not pay wealth tax.  It is up to the tax payer to decide which property he shall include for the purpose of calculation of wealth tax. He can also change the property for next year’s wealth tax calculation.

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