Should I Declare Interest Income in My I-Tax Returns
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It’s that time of the year when you have started preparing for the biggest event of the year. The event that brings painful memories of all the taxes that were taken away from you in the form of TDS (Tax Deducted at Source) from your salary and other income such as interest from bank etc.
Most of us assume that our pain ends with the TDS. However, that is just the beginning of a journey that would culminate only with the filing of our i-tax return, wherein we complete two tasks.
- Declare all income earned during the previous year
- Pay up the entire tax liability
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Declaring the entire earned during the previous year means that you are informing the Income Tax Department (ITD) of the actual amount earned under various heads such as salary, interest, house rent, capital gain / loss etc.
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Paying the entire tax liability means that you pay your total tax dues in any of the following ways viz., TDS, Advance Tax or Self Assessment Tax.
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General presumption is that, if TDS has been effected then the entire tax liability has been taken care of & there is no further payment required to be made to the ITD. However, this is only partly true, let’s take an example to understand this.
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Mr. X
Amount (Rs.)
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Mr. Y
Amount (Rs.)
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Salary
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630,000
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630,000
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Bank Interest
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NIL
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27,000
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Total Income
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630,000
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657,000
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LIC Premium Deduction
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100,000
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100,000
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Net Income
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530,000
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557,000
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Tax on Net Income
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64,000
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72,100
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Surcharge & Cess
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1,920
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2,163
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Total Tax Liability
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65,920
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74,263
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Taxes Paid
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TDS – Salary
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65,920
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65,920
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TDS – Interest
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NIL
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2,781
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Total Tax paid
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65,920
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68,701
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Further Tax Payable
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NIL
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5,562
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In the above example, we have examined two situations, wherein Mr. X & Y have the same salary income except that Mr. Y additionally has interest income of Rs. 27,000. Here, though the bank has recovered TDS on the interest, Mr. Y has to pay balance tax of Rs. 5,562. The reason for this is that the bank has recovered tax @ 10.3% of the interest amount but as Mr. Y also has salary income, he is in the highest tax slab i.e. of 30% hence there is a gap in tax paid by him.
Having understood this, it is pertinent for you to comprehend the effect of not declaring such interest income to the tax authorities.
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1. Re-assessment – The Income Tax Officer (ITO) has the power to re-assess / reopen cases where she/he believes that income has escaped assessment. Such power is vested with the ITO upto 7 years from the end of the financial year subject to certain income criteria. To you, 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.
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2. Penal Interest – In case the tax has been short paid, you may be liable to pay penal interest on two counts. First, on account of default in payment of taxes (section 234B); second, on account of deferment in payment of taxes (section 234C). To you, this would mean large outflow of money over and above the tax required to be paid as the interest on pending tax dues is charged at 1% per month.
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3. Penalty – The ITO is empowered to levy a penalty on you, if any concealment of income case is proved against you. To you, this would mean a very large outflow, which could be upto 3 times the tax that was evaded by such concealment of income.
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Considering the above points, it seems pertinent to declare interest income and relax. We are though of the opinion that the tax authorities could do better to allow some relaxation for small interest earners. The earlier section 80L deduction that was available to assessees made lot of sense. It kept small interest earners out of the tax hook, thus making life easier for both assessees (who never had to bother about declaring small interest amounts for taxation) as well as the tax authorities (who did not have to waste time on chasing small interest earners). Unfortunately sensible aspects never continue in India.
Team RwT
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