Choosing the right tax return form: a prerequisite to keep troubles at bay

Which form should I use for filing my Income Tax Return (ITR) for the tax year 2014–15 and what all information am I required to declare in it?

This is the question I have been asked the most by my friends during filing of returns. The ITR forms issued earlier for the tax year 2014–15 were criticized for the quantum of information required. The reissue of the forms will make the return-filing process simpler and convenient for taxpayers.

The relaxation from reporting of foreign travel details (except for furnishing passport number, if available) and reporting of balances in Indian bank accounts, addresses concerns raised by taxpayers and provides relief. Furthermore, the removal of cap on exempt income for use of simple ITR 1 and introduction of simplified ITR 2A, enables use of these forms by large number of salaried class taxpayers.

However, a taxpayer is required to choose the applicable form of the ITR carefully, depending upon the source of income earned, exemptions availed, foreign assets/income etc.

Another important change in the revised ITR forms is an option to furnish the Aadhar card number as a verification mechanism and get away with the earlier requirement of sending a signed copy of ITR V to the tax department.

ITR 1is applicable to taxpayers, who have income from salary/other sources and own one house property. If you own more than one house property, have brought forward loss from previous years, have income from winning from lottery and race horses, this form is not applicable. The revised form removes ceiling limit in respect of exempt income, other than agricultural income, and thereby expands scope of its usage by an expanded taxpayer group. Where exempt agricultural income of a taxpayer exceeds INR5000, he/she may use ITR 2 or ITR 2A, as the case may be.

ITR 2A has been released for individuals/HUFs with income from salary/other sources/ more than one house property. The taxpayer should not have business income, capital gain/ losses, foreign assets/income etc. Currently, individuals/HUFs who have exempt agricultural income in excess of INR5000 can make use of ITR 2A. This form can still be filed if you have earned long-term capital gains from sale of shares on which STT (securities transaction tax) is paid — these are exempt from tax.

ITR 2 – is applicable to individuals/HUFs who have earned capital gains income or those who are ordinarily tax residents in India with foreign sources of income, or have a signing authority in a foreign bank account or have foreign assets or financial interest in an entity outside India. Tax payers may also have salary income and income from house property; however, taxpayers should not have any income from business or profession.

The amended form ITR2 requires details of utilization of amount deposited in capital gains accounts scheme to enable monitoring of reinvestment supporting capital gain exemption. All these changes in reporting requirements will make taxpayers more thoughtful while taking a benefit of any of the schemes knowing they will be monitored on the same and will be required to provide complete disclosure of facts.

It has also been amended to report information related to foreign income/assets held by ordinarily tax residents of India. This disclosure of foreign assets links it to the newly enacted “Black Money (Undisclosed foreign income and assets) Imposition of Tax Act, 2015” (referred to as the new Act).

Each ordinarily tax resident of India is required to report his foreign income/assets/financial interest in any entity/ foreign bank accounts/signing authority in accounts and foreign trust. An exemption to expatriates staying in India on a business, employment or student visa to report foreign assets acquired by them in the past when they were non-resident, provided that no income is derived from such assets during the current tax year has been provided. However, availability of such option for accompanying spouse/dependent of an expatriate, who may be on dependent visa, has not been clarified. Non-residents claiming exemption of capital gains due to favorable treaty provisions or income from other sources chargeable at special rate provided in treaty will be required to report all the details such as country name, article number of treaty, amount of income/capital gain exempt, whether tax residency certificate (TRC) was obtained etc. The reporting requirements such as the above will help the tax payer in self-validating the authenticity of the exemption claimed and perform self-due diligence before availing any such benefit.

While providing option to expatriates on business/employment/ student visa not to disclose foreign assets (not earning any income from these assets during current year) acquired in the past while they qualified as non-resident is a welcome move, the manner in which relaxation has been provided requires more clarity. The point to be noted and to be considered carefully is that the option has been provided by way of note to Form ITR 2 and not by statutory rule. The enlarged foreign asset/income reporting requirements for ordinarily tax resident will need careful evaluation and compliance to avoid any possible default, attracting severe penalty/prosecution under the new Act.

The new Act has been introduced to deal with tracking, and bringing back illegally stashed money/ assets abroad. It became law on 26 May 2015 after being passed by both Houses of Parliament and on receiving Presidential assent. It became operational with effect from 1 July 2015. The new act is considered as a separate law for taxation of undisclosed foreign income and assets and has stringent penalties and prosecution, including rigorous imprisonment of up to ten years and penalty equal to three times of the tax for violation of provisions.

Under the new Act, every ordinarily tax resident of India will be required to disclose his foreign income, foreign assets and any other financial interest in a foreign entity. In this regard, taxpayers are provided a one-time opportunity for 90 days to come clean and avoid the harsh consequences of not disclosing the same before. They could declare and disclose their unreported foreign assets and income by 30 September 2015 and pay tax as well as penalty @30% each. The tax and penalty on such declared assets or funds can be paid till 31 December 2015. In case they do not declare their overseas assets and if the same is discovered by Indian revenue authorities, they may be liable to pay tax and penalty of 30% and 90%, respectively at a later date and may face prosecution.

To assess the value of foreign assets, separate guidelines detailing the parameters of valuing each of them have been notified.

Therefore, choose your ITR form wisely and declare/disclose the correct/required information to stay worry free.

The more time you spend now in collating the relevant information, backup documentation and selecting the right forms for your tax return will definitely save you a lot of time in future in dealing with the tax authority/correspondence.

The below table summarizes the applicability of different ITR forms for individuals/HUF for the tax year 2014–15:

ITR forms Particulars of income
ITR 1 Income from salary/pension/one house property (other than loss brought forward from previous years)/other sources (excluding loss under this head, winning from lottery and income from race horses)/exempt income (other than agricultural income exceeding INR5,000)
ITR 2A Income from salary/pension/ more than one house property/ other sources (excluding loss under this head, winning from lottery and income from race horses)/ agricultural income exceeding INR 5,000/exempt long-term capital gains on which STT has been paid
ITR 2 Income from salary/pension/house property/other sources/capital gains/agricultural income exceeding INR5,000/claim for relief under tax treaty and/or credit for taxes paid in non-treaty country/foreign assets/income

 


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