Don't try to evade tax on interest

As interest income comes under greater scrutiny by the taxman, avoid falling foul of the law.
The tax department has increased scrutiny of fixed deposits. According to news reports, individuals who earn from fixed deposits but do not pay tax or file their tax returns are under the taxman's radar. And for good reason. When it comes to the taxability of interest income, there are a lot of misconceptions in the minds of taxpayers.The biggest misconception is that their fixed deposits will remain hidden from the prying eyes of the taxman. The TDS is a dead giveaway for such investors. If the income from fixed or recurring deposits exceed Rs 10,000 in a financial year, the bank will deduct TDS, which will show up in the Form 26AS, along with the interest income earned by the individual during the financial year. Another misconception is that no tax is payable if the bank has deducted TDS. But TDS is only 10% of the income.If the investor falls in a higher tax slab, his liability would be higher because interest is fully taxable as income.
Don't try to avoid TDS
Some try to avoid TDS by breaking up their investments into smaller deposits across several banks. But experts warn against such attempts to evade tax. “It is compulsory to submit your PAN when you invest in a fixed deposit,“ says Archit Gupta, CEO and Founder of Cleartax.in. “There is no way to keep such investments hidden for long.“
Others try to hoodwink the tax authorities by submitting Form 15G or 15H. These forms are declarations that the individual's income for the year is below the taxable limit and therefore no TDS should be deducted from the interest. However, misuse of these forms can invite the wrath of the tax department.“A false declaration not only attracts penalty but also prosecution,“ says Sudhir Kaushik, Co-founder and CFO, Taxspanner.com.
Misusing Form 15G and 15H
Don't think you can get away by submitting the Form 15G or 15H, just because the banks doesn't question you. “Banks are supposed to mention the names and PAN details of such investors in their TDS returns,“ says Mumbai-based chartered accountant Shubham Agrawal.This information then makes its way to the Form 26AS of the individual. One can only imagine what will happen to an investor whose Form 26AS indicates submission of Form 15G or 15H at multiple banks and an income that exceeds the basic exemption limit.
Tax filing portal Tax spanner scrutinized the returns filed by assesses and found that almost 90% had not reported any interest income. That's odd, given that all taxpayers have bank accounts and interest accrues on the balance.This interest is tax free up to Rs 10,000 a year under Section 80 TTA. Any amount above that limit is taxed as income. However, since there is no TDS on savings bank interest, this income is rarely reported. In future, as banks start sharing data, TDS could be applied to deposits made across other banks as well.
All in the family
Another common way to avoid tax is by investing in the name of a non-working spouse or minor children. Money gifted to a spouse or a minor child does not attract tax. But if that money is invested, the income it generates is clubbed with the income of the giver and taxed accordingly. However, the clubbing happens only at the first level of income. If the amount earned as interest is reinvested and earns an income, it will be treated as the income of the recipient, not of the giver. Here's how you can make this rule work for you. Gift money to your non-working spouse and then invest it in any tax-free investment option. The earning will be clubbed with your income, but since it is tax-free, it won't push up your tax liability. Your spouse can then reinvest that money, the income from it wll not be clubbed.
Mom and dad can help
It is simpler if you invest in your parents' name. If any or both of your parents do not have a high income, while you are in the highest 30% tax slab, you can gift them money to invest in fixed deposits. If a person is above 60, up to Rs 3 lakh earned is tax free in a year. Unlike investments made in the name of a spouse or a minor child, there is no clubbing of income in the case of parents.So, a person above 60 can potentially earn Rs 3 lakh per year without any tax implication. If he invests in tax-saving schemes under Section 80C, the income can be as much as Rs 4.5 lakh a year. In the highest tax bracket, this saves nearly Rs 1.4 lakh in tax in a year. However, the income of the parent ill have to be reported. If it exceeds the will have to be reported. If it exceeds the basic exemption limit, you will have to pay tax on it. Even so, if the parent does not earn or is in the 5% tax bracket, the tax will be quite low.
HRA also under scanner
Bank deposits are not the only things that the taxman is targeting. Also in the cross-hairs is the house rent allowance (HRA) exemption and fake rent receipts.Four years ago, the tax department lowered the threshold limit above which salaried taxpayers had to submit the PAN of their landlord for claiming HRA exemption. From Rs 1.5 lakh a year, the limit was lowered to Rs 1 lakh. From this year, the tax department has made it mandatory for those paying over Rs 50,000 monthly rent to deduct 5% TDS from the payment and deposit that amount with the exchequer.