Tuesday, February 7, 2023

WHY YOU SHOULD REPORT TAX-EXEMPT INCOME WHILE FILING ITR

While several types of income are excluded from tax, it is essential for a taxpayer to reveal such income on his ITR. Not revealing the excluded income in the income tax return (ITR) could make it tough for a taxpayer to explain the source of a particular income in the future.

Let’s understand what exempted income is?

There are different types of income that are excluded under multiple sections of the income tax act. There is a schedule called Exempt Income (EI) in the tax forms where you require to give details of exempt income.

“This is crucial to match with form 26AS details being collected from multiple sources by the income tax department. In case you have done a high-value transaction using the exempt income the same will be notified to the tax department but as you had not reported it in your tax return, the tax department may ask for the root of income to procure 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 the sanctioned provident fund, public provident fund, superannuation funds, scholarship received for completing education, and interest earned from insured savings accounts up to ₹3,500 in a financial year.

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Dividend income received from home 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 submitting a tax return is 31 December) dividend income from domestic companies were excluded from tax up to a specific limit,” said Prakash Hegde, Bengaluru-based chartered accountant. Also, many taxpayers also get unclear about the dividends received from foreign companies. It is not excluded from tax and has to be disclosed under other income,” Hegde added.

The excluded income of minor children which has to be bludgeoned in the income tax return of each of the parents also requires to be reported in the income tax return.

Also, if there is any excluded income due to a deal between India and another country, it has to be reported in the income tax return.

Gifts collected from close relatives such as husband and wife, father and son, etc as described by the tax department are tax-exempt. But it will be better to reveal such gifts in the income tax return to produce for future reference.

For example, if a person has got a gift of ₹25 lakh from a close relative and the person has not filed an income tax return or explained the same in the tax return, if he or she purchases 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 describe the source in case the same was reported in the ITR,” said Hegde.

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