Are You Missing These Common Tax Mistakes? How to Avoid Penalties on Interest Income

Not Reporting Interest Income

Though interest earned from fixed deposits, recurring deposits, even tax-saving bank deposits, and infrastructure bonds is fully taxable, people often do not report any interest income below Rs 10,000. The exemption of Rs 10,000 a year under Section 80TTA applies only to the interest earned on the balance in a savings bank account. Even so, you are supposed to declare it in your ITR and then claim the deduction.

Another common misconception is that one need not pay tax as TDS has been deducted on the income. What people forget is that the tax deducted by the bank at source is at a flat rate of 10%. However, tax slabs may vary. So, if you fall into a higher tax slab, your liability may be more, and you will have to pay the balance while filing returns. Many people forget to recalculate their liability and end up with a notice, paying higher taxes with interest and penalties.

The department can catch such mistakes by matching your ITR with Form 26AS. The taxman also digs deeper, going beyond TDS. It tracks the deposits and interest income where TDS has not been deducted, that is, where you have submitted Form 15G/H. The penalty is more severe (up to 200% of the tax evaded) as it is not a miscalculation but concealment of income.

🔍 Reporting Interest Income Correctly:
- Ensure to report all interest income earned from various sources like fixed deposits, recurring deposits, and infrastructure bonds, even if it's below Rs 10,000.
- Remember that the exemption of Rs 10,000 under Section 80TTA is specific to interest earned on savings account balance only.
- Despite TDS deductions, calculate your tax liability based on your tax slab and declare the interest income in your Income Tax Return (ITR).

🔍 Clubbing of Income:
- Be aware of the provisions of Section 64 of the Income Tax Act regarding clubbing of income when investing in the names of a spouse or minor children.
- Any income generated from gifted amounts can be clubbed with the donor's taxable income, irrespective of the recipient's income level.
- To avoid tax implications, consider investing gifted money in tax-free options or in the name of relatives where clubbing provisions do not apply.

🔍 Filing Returns:
- File your tax return even if you fall below the taxable income threshold to avoid penalties and comply with legal requirements.
- Understand the basic exemption levels based on age categories and ensure timely filing to prevent penalties under Section 271F.
- Remember to file returns if you have investments or have paid taxes through TDS or advance tax, even if your tax liability is zero.

🔍 Reporting All Income Sources:
- Report all sources of income, including earnings from old jobs, freelance assignments, tax-free income like PPF interest, and capital gains, in your ITR.
- Failure to disclose any income may lead to penalties and interest payments, so ensure full transparency in reporting all earnings.

🔍 Seek Professional Advice:
- If unsure about any tax implications or reporting requirements, consider consulting a tax professional or financial advisor to ensure compliance with tax laws and regulations.