Reasons for getting an Income Tax notice

The Income Tax Department has launched a drive to ensure greater tax compliance. In recent months, thousands of taxpayers have been served notices after discrepancies were noted in their tax returns or their TDS details.

This sudden rise in the number of tax notices is not because people have stopped paying tax or filing their returns. It's just that the tax authorities now have an integrated database on taxpayers and can track almost all financial transactions of a person.

The 10-digit alphanumeric PAN, which has been made mandatory for most money transactions, allows the tax department to peek into your financial life.

The PAN not only tells the tax department how much you have earned, but also how you have been spending and investing that money. Besides, the Central Board of Direct Taxes has a computer-aided scrutiny system (CASS), which flags any discrepancy in the tax return filed. Here are some common reasons for the taxpayers getting notices.

Not mentioning PAN or quoting incorrect PAN

The PAN is now mandatory for high value transactions. If you do not submit it while making an investment or taking up a job, your income will be subjected to a higher tax deduction (TDS) of 20 per cent, instead of 10 per cent.

If the PAN is incorrect, you could even be slapped with a penalty of up to Rs 10,000. The bigger problem of an incorrect PAN is that the TDS will not be credited to your account. This often results in an additional tax demand. What's more, the tax refund can be credited to another account if you submit the wrong PAN.

Not checking Form 26AS before filing

The Form 26AS has details of the tax paid by an individual during a financial year. You can easily access your Form 26AS online. Some banks also provide this facility to their Net banking customers. Before you file your return, check whether your Form 26AS has correctly credited the tax deducted on your behalf.

If your bank, bond issuer or employer has deducted TDS, make sure it is mentioned in your Form 26AS. Also, check whether all the investments with TDS have been duly mentioned in the tax return. Any mismatch will lead to a notice from the department.

Mismatch in income and expenses & investments

Financial services firms, registration authorities and merchant establishments are supposed to report certain high-value transactions to the CBDT. The CASS matches this information with the returns filed by the taxpayer and promptly issue a notice if there is a mismatch.

The Income Tax Department gets all information about high-value financial transactions on the basis of the PAN that you submit to your bank, share broker, mutual fund house and registrar of properties. If the income you have declared is not matching your investments and spending, you can get a tax notice.

Not filing returns if income is above Rs 2 lakhs

If your gross taxable income before deduction under any section is above Rs 2 lakhs, it is mandatory for you to file your return. If you don't file it, you can be slapped with a penalty of up to 300 per cent of the outstanding tax. Even if there is no tax liability, the return has to be filed if the income before deductions (tax savings, education loan, home loan, etc) is above the basic tax exemption.

Not filing return by the due date

You can file your income tax return till the end of the assessment year if there is no tax due. For example, the tax return for 2012-13 can be filed till 31 March 2014 without incurring any interest or penalty if all the taxes have been paid. However, if some tax remains unpaid, filing your return after the deadline could lead to a penalty of Rs 5,000. Also, you are not allowed to carry forward your losses if you file after the due date, nor can you revise the tax return.

Not declaring the previous employer's income

This is a common problem and was easily missed by the tax authorities in the past. However, now that the tax database has been integrated, don't think you can ignore your income from a previous job. If your employer deducted TDS on your income, the details would be in your Form 26AS, and the CASS will immediately flag this discrepancy. You can be levied a penalty of up to 300 per cent of the tax evaded.

Avoiding TDS by misusing Forms 15G and 15H

If the interest income on bank deposits exceeds Rs 10,000 a year, the bank deducts TDS. You can avoid TDS by submitting Form 15G or 15H if you are not liable to tax. However, if you are trying to avoid TDS, you can get a notice from the tax department. Submitting a wrong declaration can invite a penalty of Rs 10,000. Splitting the deposits in different banks or bank branches to avoid TDS will not help as the PAN is the same.

Not declaring interest on bank deposits and post office savings

The interest earned on bonds, fixed deposits, recurring deposits and savings accounts is taxable and should be mentioned in your tax return. Up to Rs 10,000 earned on your savings bank account is allowed as a deduction, but it still needs to be included in your total income for the year. Likewise, the PPF interest income is tax-free, but should be included in the exempt income.

The following deductions are available on bank interest: interest on savings account is exempt up to Rs 10,000 for the assessment year 2013-14 & 2014-15. The interest from post office savings is exempt up to Rs 3,500, or Rs 7,000 for joint accounts.

Not responding to intimation/notice from the tax department

Don't ignore the messages and notices from the income tax department. If you do not respond, the interest and penalty keeps on increasing in case of any pending tax liability and the Income Tax Department will take a final decision that may not be beneficial for you.