 "7 tax exemptions that can land you with a penalty")
You have claimed some exemptions on your income or investments, but most of these are allowed if you fulfill certain conditions or rules. If these are not fulfilled, you could lose the exemptions.
For instance, if a taxpayer does not fulfil the criteria laid down for allowing exemption/deduction, then the exemption already allowed shall be withdrawn. In such cases, it is the taxpayer's duty to report the withdrawal of exemption in the tax return and pay the requisite taxes as applicable, says Vineet Agarwal, director, KPMG India.
Therefore, it is important to know what these conditions are. In case the income-tax department issues you a notice for 'tax evasion', the penalty could be severe, says Sanjeev Gokhale, a Mumbai-based chartered accountant. "You could be levied a penalty which can be 100-300 per cent of the amount evaded. Even if you say you were not aware of the exemption being reversed, it will not be accepted. Ignorance of law is not a justification for tax evasion."
1) Selling your house bought on loan within five years of buying it
If you take a home loan to buy a house, you are entitled to exemption on the re-payment of the principal under Section 80C. You can claim exemption up to Rs 1 lakh under this head. However, if you sell the house within five years of buying it, you will lose this exemption in the year you sell the house. For that year, the principal amount gets added to your income and you will be taxed according to your income slab.
However, the exemption for interest paid, under Section 24 (b), will not be withdrawn.
2) Surrendering a life insurance policy within two years
Premiums paid towards life insurance policy are also exempt under Section 80C, up to a maximum of Rs 1 lakh. If you purchase a life insurance policy and realise it does not meet your needs or the premium is more than what you expected, you may decide to discontinue the policy. However, if you surrender the policy within two years, you will lose the exemption on the premium paid.
3) Withdrawing provident fund amount before five years
If the amount contributed to provident fund (PF) is withdrawn before five years of continuous service (subject to specified conditions), the exemption / deduction availed at the time of making the contribution shall be withdrawn in the year of PF withdrawal.
Many of us withdraw our PF money while changing jobs. But if it is within five years, then not only will the PF money be taxed upon withdrawal, but the tax exemption received in the previous year will also be withdrawn.
4) Selling of property, which is exempt from capital gains, within three years of purchase
When you sell a property, you can claim exemption from capital gains under Section 54 of the I-T Act by investing in house property. For instance, if you had purchased a property for Rs 40 lakh and sold it later on for Rs 1 crore, you can claim exemption for the Rs 60 lakh profit by investing in another house. However, if you sell the second house within three years, then the exemption claimed earlier will be withdrawn. The entire amount will be added to your income (in this case Rs 60 lakh) and you will be taxed accordingly.
5) Delay in construction of house for which loan is taken
If you have taken a home loan to construct a house and the construction is not complete within three years from the end of the year of taking the loan, then the deduction for interest on the house will be restricted to Rs 30,000.
6) Cash donation made for an amount above Rs 10,000
Any donation made in cash under Section 80G for a social cause or for any government recognised charity is allowed for exemption only up to Rs 10,000. If the donation is more than Rs 10,000, then deduction under Section 80G is not allowed.
7) For business purposes
Businessmen or self-employed persons are allowed deduction for various kinds of expenditure incurred as part of their business. For instance, money paid to a vendor or contractor or salary paid to staff, and so on. In case the tax deducted at source (TDS) is not deducted before making the payment, then the taxpayer is required to pay tax on the entire expense incurred. This rule was introduced from 2005, says Gokhale.
For instance, if you incur an expense of Rs 1 lakh as part of your business, then you are liable to deduct Rs 2,000 as TDS, following which you can claim tax exemption on the Rs 1 lakh. But if you forget to deduct the TDS, then the Rs 1 lakh is added to your income and taxed according to your tax bracket.
However, if the taxpayer pays the TDS before the due date of filing the returns, then the exemption on the expense will be allowed.
"Though the responsibility of disclosing withdrawal of exemption in the tax return and paying taxes on the same rests with the taxpayer, in case he or she fails to report the same, then the tax authorities may seek information for the past six years under section 148 of the I-T Act," says Agarwal.
For instance, if a taxpayer does not fulfil the criteria laid down for allowing exemption/deduction, then the exemption already allowed shall be withdrawn. In such cases, it is the taxpayer's duty to report the withdrawal of exemption in the tax return and pay the requisite taxes as applicable, says Vineet Agarwal, director, KPMG India.
Therefore, it is important to know what these conditions are. In case the income-tax department issues you a notice for 'tax evasion', the penalty could be severe, says Sanjeev Gokhale, a Mumbai-based chartered accountant. "You could be levied a penalty which can be 100-300 per cent of the amount evaded. Even if you say you were not aware of the exemption being reversed, it will not be accepted. Ignorance of law is not a justification for tax evasion."
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Following are the 7 instances under which these exemptions could be withdrawn:
1) Selling your house bought on loan within five years of buying it
If you take a home loan to buy a house, you are entitled to exemption on the re-payment of the principal under Section 80C. You can claim exemption up to Rs 1 lakh under this head. However, if you sell the house within five years of buying it, you will lose this exemption in the year you sell the house. For that year, the principal amount gets added to your income and you will be taxed according to your income slab.
However, the exemption for interest paid, under Section 24 (b), will not be withdrawn.
2) Surrendering a life insurance policy within two years
Premiums paid towards life insurance policy are also exempt under Section 80C, up to a maximum of Rs 1 lakh. If you purchase a life insurance policy and realise it does not meet your needs or the premium is more than what you expected, you may decide to discontinue the policy. However, if you surrender the policy within two years, you will lose the exemption on the premium paid.
3) Withdrawing provident fund amount before five years
If the amount contributed to provident fund (PF) is withdrawn before five years of continuous service (subject to specified conditions), the exemption / deduction availed at the time of making the contribution shall be withdrawn in the year of PF withdrawal.
Many of us withdraw our PF money while changing jobs. But if it is within five years, then not only will the PF money be taxed upon withdrawal, but the tax exemption received in the previous year will also be withdrawn.
4) Selling of property, which is exempt from capital gains, within three years of purchase
When you sell a property, you can claim exemption from capital gains under Section 54 of the I-T Act by investing in house property. For instance, if you had purchased a property for Rs 40 lakh and sold it later on for Rs 1 crore, you can claim exemption for the Rs 60 lakh profit by investing in another house. However, if you sell the second house within three years, then the exemption claimed earlier will be withdrawn. The entire amount will be added to your income (in this case Rs 60 lakh) and you will be taxed accordingly.
5) Delay in construction of house for which loan is taken
If you have taken a home loan to construct a house and the construction is not complete within three years from the end of the year of taking the loan, then the deduction for interest on the house will be restricted to Rs 30,000.
6) Cash donation made for an amount above Rs 10,000
Any donation made in cash under Section 80G for a social cause or for any government recognised charity is allowed for exemption only up to Rs 10,000. If the donation is more than Rs 10,000, then deduction under Section 80G is not allowed.
7) For business purposes
Businessmen or self-employed persons are allowed deduction for various kinds of expenditure incurred as part of their business. For instance, money paid to a vendor or contractor or salary paid to staff, and so on. In case the tax deducted at source (TDS) is not deducted before making the payment, then the taxpayer is required to pay tax on the entire expense incurred. This rule was introduced from 2005, says Gokhale.
For instance, if you incur an expense of Rs 1 lakh as part of your business, then you are liable to deduct Rs 2,000 as TDS, following which you can claim tax exemption on the Rs 1 lakh. But if you forget to deduct the TDS, then the Rs 1 lakh is added to your income and taxed according to your tax bracket.
However, if the taxpayer pays the TDS before the due date of filing the returns, then the exemption on the expense will be allowed.
"Though the responsibility of disclosing withdrawal of exemption in the tax return and paying taxes on the same rests with the taxpayer, in case he or she fails to report the same, then the tax authorities may seek information for the past six years under section 148 of the I-T Act," says Agarwal.