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Monday, 27 August 2012

Why one should file tax return?

Why one should file tax return?

Team Crawfin/ Harshal Jawale, CFPCM

We as financial advisors frequently come across investors who feel filling tax returns is not necessary since taxes are already paid by the employer. We here discuss why it is important to file your tax returns every year without fail.
1.       Birth of TDS and its role in tax filling
TDS meaning tax deducted at source was introduced so that taxman can get each and every entry of your income; from employer for salary or from bank in respect of interest income. Today TDS is deducted from every income at a rate of 10% and this tax is paid to taxman on behalf of you while actual tax liability (rate ranging from NIL to 30%) is left to be assessed for you. One may view his tax credits from form 26AS and confirm tax payment made by employer or bank. Hence note every income where TDS is deducted is already been notified to taxman.
2.       Penalty on late tax filling
In the current year previous year is 2011-12, assessment year is 2012-13 and it ends on 31/03/2013. There is no liability for late filing of income tax return up to 31.03.2013 and after that assessing officer (AO) can impose a penalty of 5000, and that is also his power which he may or may not exercise after giving due hearing to the assessee. If there is tax due after deducting advance tax, TDS and self assessment tax then interest will be applicable @1% per month.
3.       Loss on Tax Refund amount
An individual is expected to maintain records of income for 7 years by the tax department. Let us say if one has not filled tax return for this year but in next year if he faces a situation where tax is cut more than estimated and he seeks tax refund. Please note in such a case assessing officer will slap a notice first to file this year tax return with penalty and only then take the case of next year refund in hand. One may expect such notice for any of the 7 years before this year irrespective of refund-like issue.
4.       Re-assessment of old tax filling
The Income Tax Officer (ITO) has the power to re-assess / reopen cases where he believes that income has escaped assessment. Such power is vested with the ITO up to 7 years from the end of the financial year subject to certain income criteria. This means that even if you have not included certain income in a particular year, the ITO could possibly re-open your case & get you to pay the tax on the same in any future years. The ITO is empowered to levy a penalty on you, which could be up to 3 times the tax that was evaded by such concealment of income.

5.       ITR – V acknowledgment of tax filling
It is one of the pre-requisite documents for passing of loan from bank or while completing employment related visa formalities.

“Wealthy Investments need Healthy Methods”

Investing in Fixed Deposits - Banks

Investing in Fixed Deposits - Banks
Source - Team Crawfin/ Harshal Jawale, CFPCM
 
Most investors today are refraining to invest into equities and are looking to increase exposure to fixed deposits. Though it is sensible to lock in surplus funds at higher interest rate which may be just peaking out, here we lists few things that you must know before investing into fixed income options –
  1. Fixed deposits are not completely safe
Before this recession investors used to think that fixed deposits are the safest option. Banks all over the world of all sizes when forced to shut down, we realized that even FDs are not safe. In fact when banks go bust we may even loose principal amount (forget returns).  In India we may not have faced such situation (thanks to RBI) except some co-operative banks but then such situation always come as a surprise. We also have Deposit Insurance and Credit Guarantee Corporation (DICGC) that insures deposits of up to Rs 1 lakh per customer across all branches of a particular bank.
  1. Premature withdrawal attracts penalty
We often tend to book FD for higher duration because it offers 25-50 bps (0.25%-0.5%) extra. But we also need to note that if we happen to break FD before maturity then bank usually slap 100 bps penalty lowering our effective return. So most advisors recommend us to book FD for shorter duration and then renew. We disagree with this, as it may sound fit in theory but in practice it doesn’t work. We always recommend our investors to book FD for 3-5 years (tenure that offer highest interest rate). This is a tenure where usually investor has clear idea of his fund requirement plus we often seen that money just lies into saving account for many months. Instead we believe it is better to book FD for higher duration and then be ready to break FD if need arises. This also ensures higher interest rate earned which may not be available at the time of renewal.
  1. TDS is just an interim tax
As per present income tax guidelines, banks are required to deduct tax at source (TDS) on deposits if the total interest earned on all your fixed deposits in a bank is more than Rs.10,000 in a financial year. However, the depositors can claim the credit for such TDS in their income tax returns.
In case of resident individual and HUF, for a payments upto Rs. 10 lacs, TDS is  deducted at a rate of 10.3% (including education cess). But this is not the complete tax liability against the returns earned. We need to include this interest income into our total income and pay tax according to our tax bracket. So if you fall in 30% tax bracket i.e. total income above INR 10 lakh/pa then you must pay remaining 20% (tax liability-TDS) tax amount before tax filling every year.

4.       Form 15G & 15H

The form 15G and 15H are submitted to banks by depositors who DO NOT want TDS be deducted from their interest earned on fixed deposits.  A person who is below 65 years can file the Form 15 G. In order to be eligible to furnish Form 15G, the non-senior citizen investor needs to fulfill the following two conditions:
§  The final tax on his estimated total income computed as per the provisions of the Income Tax Act should be nil; and
§  The aggregate of the interest etc. received during the financial year should not exceed the basic exemption slab
A person of 65 years or more is eligible to file Form 15 H This form can be submitted by senior citizen only if tax on estimated income of the senior citizen is NIL.
5.       Flexi Fixed Deposit

Flexi-deposits are similar to savings accounts. The only difference is that on the basis of your regular cash needs, you could set a limit and instruct the bank to transfer the balance of your idle money to the term deposit.

This may be the best option to park funds as it provides liquidity plus term deposit interest rate. But they fail to realize that the term deposit rate which never shown clearly by the banks is actually rate for 90 days which is often 5%.  According to us it is still a good product but only for short term where liquidity is preferred over return. This cannot be replacement to fixed deposit.

          “Wealthy Investment needs Healthy Methods”