ITR: Why you must report tax-exempt income on your tax return?
There are certain types of exempt income from tax, it is important for a taxpayer to disclose such income on their income tax return (ITR). In future, it may become difficult for a taxpayer to explain the source of a particular income, if exempt income is not disclosed now in ITR.
Various types of income are exempt from taxation under various sections of the income tax act. In the tax return forms, there is an Exempt Income (EI) schedule where you must disclose your exempt income.
There is a requirement to match the information provided by taxpayers in their ITR with the details available on Form 26AS that the Tax authority collects from a wide range of sources. If you made a high-value transaction with exempt income, the income tax department will be notified, but because you did not report it on your tax return, the tax department may inquire about the source of income used to purchase the asset.
Income from statutory provident funds, public provident funds, superannuation funds, scholarships received, and interest earned from postal savings accounts up to Rs 3,500 in a financial year are all exempt from income tax.
Many taxpayers are also confused by dividends income received now as it is not tax-free and must be reported under other income. Exempt income of minor children that must be clubbed in either parent’s income tax return must also be reported in the income tax return.
Gifts from close relatives, such as husband and wife, father and son, and so on, are tax exempt. However, it is advisable to report such gifts on your income tax return for future reference.
For example, if a person receives a gift of Rs. 25 lakh from a close relative and does not file an income tax return or disclose the gift in the tax return, and uses the money to purchase an asset. In future, t he seller of the asset like Mutual Fund etc will report it to the tax department. If the source was reported in the ITR at right time, it will be easier for the person to explain.
If the person is unable to explain the source, the tax department may impose a penalty. Unaccounted income is taxed at a rate of 60% plus a penalty.
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