If it’s been a year since you have graduated from college and landing your first job, July 31st would be a date that ought to be firmly etched into your mind. Why? Because it is going to be the first time that you’d have become an income tax assessee and hence filing your tax returns. While you may have spent a better part of the last twelve months learning the ropes of your career and firming your position on the first rung of the corporate ladder,you may have been oblivious to the need for tax planning until you actually get down to filing your tax returns and waking up to the reality of how much of your hard earned salary goes into the government’s coffers.
Paying your rent and credit card bills may have become an inescapable part of your life and so have the EMI payments for your swanky bike that makes heads turn or those of your recently purchased nifty smartphone. Tax planning however remains low in the pecking order and one of the primary reasons for it would be tax deducted from your salary by the employer aka TDS (Tax Deducted at Source) that leads you to reconcile to the net salary credited into your bank account being what you actually earn. The reality however is far from it.
Through this article which is presented as a Q&A, I will look to clear some common misconceptions and guide you through the procedure of tax returns filing, while making an attempt to drive home the importance of tax planning.
I earn a salary and there is a TDS every month. Do I still have to file tax returns? If yes, how do I account for TDS?
Even if you earn a salary and tax is deducted at source by your employer, you need to file an income tax return. Paying tax and filing a return are separate activities. The former is paying your due to the government; the latter consists of providing the government with a declaration that you have paid what is due. Your employer deducts tax every month with appropriate deductions based on your investment declarations to them. If you have worked with one employer for the entire financial year then this will be taken care of in your Form 16 document that will be provided by your employer.
I get the importance of filing my returns, but do I now have to use the services of a Chartered Accountant (CA) or use online tax filing portals to file my returns?
Those with complex tax filing requirements such as those with other sources of income (apart from salary) which merit advance tax payments and if they haven’t been paid on time, attract penalties and penal interest may require the advice of a CA to compute and file their taxes. For those of you with a single source of income like a salary, the tax filing is usually straight through based on the Form 16 provided by your respective employers. In most cases you just need to enter the numbers from your Form 16 into the tax filing portal and the platform guides you through the relevant steps. You can visit the Income Tax Department’s portal and file your returns there with your authentication credentials.
What are the mistakes that I am likely to commit while filing tax returns?
Often sources of income like interest on fixed deposits, savings bank interest and capital gains (both short term and long term) are not included by the tax assesses. Remember the government tracks such information since all your bank accounts, mutual fund folios, trading accounts, etc. are linked to your PAN. Not declaring this is a violation and may lead to incorrect tax computation. In fact even non-taxable income like interest on PPF, dividends received (under Rs 10 lakhs), and savings bank interest (less than Rs. 10,000) need to be declared in your tax filing. Not computing tax payable correctly will lead to penalties (on the unpaid amount) and penal interest on the delayed payment.
What are the benefits of filing tax returns online?
It generates an instant record, with faster turnaround of acknowledgements and responses.
While computing my income tax payable, I was shocked to see the amount! I have heard about investments made to save on tax. Is that what you call Tax Planning?
Good tax planning is about reducing your tax outgo by structuring your finances around your goals and ensuring protection. Tax planning helps you meet these objectives through investment instruments which provide maximum bang for the buck. For instance, is there a point in buying an insurance plan with very high commissions to save tax? Absolutely not, since what you save as tax could get paid out as commission, thereby leaving you no better off.
Good tax planning is about structuring your salary, (for instance, making sure your House Rent Allowance is appropriate for the rent you pay) and making sure you are correctly investing your money (for instance not putting your long term savings in FDs, but in debt or equity mutual funds which provide you with more tax efficient returns and are taxed only when the capital gain is realized).
If you are looking to get married, structuring your home purchases and the home loan repayments can benefit you immensely. This can be done by holding a joint property and taking a joint loan with your spouse with both taking advantage of the interest deductible.
These measures go beyond what can be done by purchasing the right tax saving products and provide bigger savings. Afterall, knowing about these is essential to make you make your hard earned money work harder for you!
(The author is CEO, BigDecisions.com)
Updated Date: Jul 19, 2016 15:46 PM