Salaried individuals often make two significant mistakes in their Income Tax Returns (ITRs) that can lead to severe financial penalties. Understanding these pitfalls is the first step toward ensuring a compliant and stress-free tax filing season.
1. Claiming Wrong Exemptions
Incorrectly claiming disallowed allowances, especially under the new tax regime, leads to under-reporting of income.
2. Misclassifying Income
Converting salary into professional receipts to wrongly claim presumptive taxation benefits under Section 44ADA.
Penalties for Misreporting Income
These are not minor oversights; the Income Tax Department treats these errors seriously, with penalties defined under Section 270A.
Under-reporting Income
This can result in a penalty of 50% of the tax payable on the under-reported amount.
Misreporting Income
Falsely representing facts, like showing salary as professional income, can attract a severe penalty of 200% of the tax, plus the actual tax and interest.
The Trap of Converting Salary to Professional Receipts
Some individuals are advised to convert their salary into professional income to use presumptive taxation under Section 44ADA. This scheme allows certain professionals to declare only 50% of their gross receipts as profit, thereby lowering their taxable income.
This is an incorrect interpretation and invalid for typical employees. The 50% rule is meant for professionals who have significant business expenses, saving them from mandatory audits—it is not a tax loophole for the salaried class.
An Example of Tax Evasion
Consider a salaried person with a ₹10 lakh income, who would normally pay about ₹75,000 in tax. If they falsely declare ₹14 lakh as professional receipts and claim 50% (₹7 lakh) as deemed expenses without any actual expenditure, their taxable income becomes ₹7 lakh. This results in zero tax due to the Section 87A rebate.
If caught, this action constitutes misreporting and can lead to a 200% penalty on the evaded tax.
Recommendations for Compliance
To avoid these pitfalls, it is crucial to follow the law correctly. Here are the key takeaways:
Report Income Correctly
Always report your income under the correct head: 'Salary' for salaried employees.
Verify Your Documents
Cross-reference your calculations with key documents like Form 16, salary slips, Form 26AS, and AIS.
Understand Allowances
Remember that most allowances (HRA, LTA, etc.) are not allowed under the new tax regime. Only claim what is permitted.
In Conclusion, while seeking to minimize your tax burden is natural, it must be done within the legal framework. Ensure that you declare the correct income head and only claim expenses and allowances permitted by law to maintain financial integrity and avoid severe penalties.