Filing income tax returns (ITR) is a yearly obligation for millions of taxpayers, from salaried individuals to seasoned financial professionals. While many assume they know the ins and outs of ITR filing, even experts can fall into common traps that lead to unnecessary tax liabilities or, worse, audits. Understanding these pitfalls and how to avoid them can save you both time and money. This advanced guide highlights the most frequent ITR filing mistakes that even the most seasoned taxpayers make and offers tips on how to avoid them.
1. Using the Wrong ITR Form
One of the most fundamental errors is filing your return using the incorrect ITR form. The Income Tax Department provides various ITR forms based on the type of income you earn. Filing the wrong form can lead to complications, including notice from the tax department.
- Pro Tip: Ensure you select the correct form for your income profile. For example, salaried individuals with no other significant income should use ITR-1, while those with income from business or capital gains should opt for ITR-2 or ITR-3.
2. Not Reporting All Sources of Income
Even the most experienced taxpayers sometimes forget to declare small or irregular sources of income. Whether it’s interest from savings accounts, rental income, freelance earnings, or dividends, failing to declare all sources can result in penalties.
- Pro Tip: Always cross-check your Form 26AS to ensure you’re not missing any income. Form 26AS provides a comprehensive summary of all income reported by third parties, including banks and employers.
3. Failing to Claim Deductions Correctly Under Section 80C
Experts often make the mistake of miscalculating or failing to claim the maximum allowable deductions under Section 80C. You can claim up to ₹1.5 lakh in deductions for investments in options like Public Provident Fund (PPF), National Savings Certificate (NSC), Equity Linked Savings Schemes (ELSS), and Employee Provident Fund (EPF).
- Pro Tip: Plan your investments early in the financial year to maximize your Section 80C Also, ensure that each investment is eligible under Section 80C and keep the necessary documentation.
4. Incorrect Claiming of HRA
House Rent Allowance (HRA) is a significant tax-saving avenue for salaried individuals. However, claiming HRA without proper documentation or inflating the claim can lead to scrutiny.
- Pro Tip: Ensure that you have valid rent receipts and, if required, a rental agreement. The amount claimed should reflect accurately in your employer’s Form 16. Claiming HRA for rent paid to a family member living in the same home can be a red flag.
5. Overlooking Deductions Under Section 80D for Health Insurance
Under Section 80D, you can claim deductions for health insurance premiums. However, many taxpayers either over-claim or under-claim this benefit, especially when it comes to premiums paid for senior citizens.
- Pro Tip: Make sure you correctly claim deductions up to ₹25,000 for your own and family’s health insurance, and up to ₹50,000 if you’re paying premiums for senior citizen parents. Additionally, up to ₹5,000 can be claimed for preventive health check-ups.
6. Ignoring Income from Previous Employers
A common oversight is not reporting income from a previous employer, especially if you’ve changed jobs mid-year. Failing to do so can lead to a mismatch between your Form 26AS and your declared income.
- Pro Tip: When you switch jobs, always report your income from your previous employer. Ensure that both employers provide accurate Form 16 details and adjust your TDS to avoid double claims.
7. Capital Gains Miscalculations
Misreporting or underreporting capital gains is another common mistake, particularly for those who trade stocks or invest in property. Both short-term and long-term capital gains must be accurately reported.
- Pro Tip: Use the correct ITR form for reporting capital gains. For short-term capital gains, no indexation benefits apply, while for long-term capital gains (held for more than 1 year for shares), you can claim indexation. Keep detailed records of your investment transactions, including purchase and sale dates.
8. Overlooking the New Income Tax Regime vs. Old Regime Choice
Many taxpayers, including experts, forget to weigh the benefits of the new income tax regime (introduced in FY 2020-21) against the old regime. The new regime offers lower tax rates but excludes most deductions, which may not be beneficial for everyone.
- Pro Tip: Use online tax calculators to assess which regime (old or new) suits you best. If you have substantial deductions under Section 80C, 80D, and others, the old regime may be more favorable.
9. Failure to Report Foreign Income or Assets
For taxpayers with overseas income or foreign bank accounts, failing to declare these assets can result in heavy penalties. The Income Tax Department is increasingly focusing on overseas income, and failure to report foreign assets can lead to an audit.
- Pro Tip: If you have foreign bank accounts, foreign investments, or income from overseas, declare them in Schedule FA of the ITR form. Use ITR-2 or ITR-3 if you have foreign income or assets.
10. Not Verifying ITR Before Submission
One of the most critical steps in the ITR filing process is verification. Without verifying your return, it is considered invalid. Many taxpayers fail to complete this final step, thinking the return is complete once submitted.
- Pro Tip: Use e-verification (via Aadhaar OTP, Net Banking, or Digital Signature) to ensure your return is processed. If you’re unable to verify electronically, send the signed ITR-V form to the Centralized Processing Centre (CPC) within 120 days of filing.
11. Misreporting TDS Credit
Many taxpayers either fail to report the correct Tax Deducted at Source (TDS) or claim excess credit. Discrepancies in TDS credit claims can lead to mismatches between the tax return and the income reported by employers and financial institutions.
- Pro Tip: Cross-check the TDS credits in Form 26AS and reconcile them with your Form 16 and bank interest certificates before filing. Ensure that you don’t claim more TDS than reflected in your Form 26AS.
12. Not Keeping Sufficient Records
In the age of digital filing, many people overlook the importance of maintaining proper records for future reference. Audits or scrutiny notices can come several years after the return is filed, and not having proper documentation can lead to complications.
- Pro Tip: Keep all tax-related documents, such as Form 16, Form 26AS, investment proofs, and receipts for at least 7 years. This includes documentation for capital gains, health insurance, home loans, and other deductions.
13. Misjudging the Deadline for Revised Returns
Taxpayers, including experts, sometimes realize mistakes in their ITR after submission but miss the deadline for filing a revised return. This leads to prolonged issues and possibly penalties.
- Pro Tip: You can file a revised return any time before the end of the assessment year or before the completion of the assessment, whichever is earlier. If you spot errors, don’t delay in revising your ITR to correct them.
Conclusion: Mastering Advanced ITR Filing
Even seasoned professionals can make mistakes when filing their income tax returns, but with the right knowledge and tools, these errors can be avoided. From choosing the right ITR form to accurately reporting all sources of income, taking care to avoid these common pitfalls can save you from scrutiny, penalties, and audits. Stay informed, be meticulous, and consult with tax experts when necessary to ensure a smooth ITR filing experience.