Can you avoid tax on cash?
| Nov 21 2016 : The Times of India (Delhi)
Team ET Wealth
|
Tax consultants are busy working out strategies to legitimise the cash held by people
The tax helpline of Cleartax hasn't stopped ringing since 9 November when Indians woke up to demonetisation of `500 and `1,000 notes. "People are calling up to know how they can declare the cash they hold without incurring a tax liability," says Archit Gupta, Founder and CEO of the tax filing portal.
Tax professionals say that honest taxpayers have nothing to fear. "If you have `500 and `1,000 notes lying with you, there is no reason to panic if you can explain the source of cash," says tax and investment expert Balwant Jain. You can go and deposit it in your bank or exchange it for new notes. But, as tax officials have warned, the cash you deposit in the bank must match the income declared in your tax return. "We would get the details of accounts in which more than `2.5 lakh have been deposited. Any mismatch with income declared by the account holder will be treated as a case of tax evasion," Revenue Secretary Hasmukh Adhia warned.
Misreporting of income invites a penalty of 200% of the tax payable under the new Section 270(A) of the Income Tax Act. Those depositing `3-5 lakh will not face too much problems because the tax and penalty will be within reasonable limits. But those with a larger sum may have to pay a huge sum as penalty . The effective tax for someone depositing `20 lakh is 63.5% and it keeps rising as the amount increases (see table). "Under the Income Declaration Scheme which ended on 30 September, they would have paid only 45% tax and no questions asked.Now they will have to answer a lot of questions and pay a higher tax. Even then, there is no immunity from prosecution," says Sudhir Kaushik, Co-founder and CFO of tax filing portal Taxspanner.He points out that the Prime Minister had repeatedly exhorted people to come clean under the declaration scheme.
Chartered accountants and tax con sultants are in high demand as people with cash seek ways to get around the ban on high denomination notes. Tax professionals are charging between 5% and 25% to suggest strategies that can convert unaccounted cash into legitimate money, which can then be safely deposited in the bank account. Here are some of the hacks being used:
SAVINGS OF HOMEMAKER
Cash can be shown as money saved by the housewife out of the monthly household budget. A homemaker can also show a reasonable amount as her personal pocket money . There is no fixed amount mentioned in the tax laws about how much money can be saved like this, but it has to be a reasonable amount and should be commensurate with the total household income and monthly expenses. If the taxpayer earns `80,000 a month and the household expenses are `40,000, his wife should be able to put away `8,000-10,000 every month. Watch out for The tax department would launch a scrutiny if the amount saved exceeds 20-25% of household budget.
INCOME FROM TUITIONS, COOKERY CLASSES
There has been a surge in the number of people who earn from home tuitions or cookery classes. "An income of up to `2.5 lakh a year can be shown as earned from giving tuitions. Tax professionals are encouraging people to file tax returns of the past two years (2014-15 and 2015-16) to make the case more airtight.Tax laws allow delayed returns to be filed and there is a small 1% penal interest charged for every month of delay if there is some tax due. "If the individual has not been filing tax returns, this is a good time to file the previous years' returns and get on track," says Gupta. This will allow such taxpayers to report a higher income this year.
Watch out for
If the income reported is too high, the tax department could scrutinize the returns and ask the assessee to furnish the names of students. In extreme cases, they will also investigate the daily routine of the assessee.
GIFTS FROM RELATIVES
Another common trick is to show the cash as gifts from relatives. Gifts from certain specified lineal relatives are not taxable if the recipient is an adult. However, the amount should be commensurate with the overall economic status of the household. A family with a monthly income of `1 lakh may get cash gifts of about `40,000-50,000 in a year.
Watch out for
If the amount shown as gifts exceeds reasonable limits, tax department may scrutinize source of income of giver.
WEDDINGS AND MUNDANS
Those who tied the knot this year or whose children had their mundan ceremony recently are also in luck. "Weddings and mundans are occasions when gifts from non-relatives are tax-free.They can show the cash as gifts received on these occasions," says Chartered Accountant Minal Agarwal. However, the sum should be commensurate with the overall economic status of the family .Also, this is a double-edged sword. "If the wedding was a lavish affair, the tax department could also ask for the source of the money spent on the wedding," says Kaushik of Taxspanner.
Watch out for
If amount exceeds reasonable limits, tax department may scrutinise givers.
PAY ADVANCES TO WORKERS
Small businessmen, entrepreneurs and even salaried people can pay advance wages to employees and vendors. There is no limit to how much cash can be given out but it should cause any inconvenience to the recipient.
Watch out for
Once given 2-3 months' advance payment, employees may be tempted to switch jobs. Instead, it is better to give loans with proper paperwork.
Tax professionals say that honest taxpayers have nothing to fear. "If you have `500 and `1,000 notes lying with you, there is no reason to panic if you can explain the source of cash," says tax and investment expert Balwant Jain. You can go and deposit it in your bank or exchange it for new notes. But, as tax officials have warned, the cash you deposit in the bank must match the income declared in your tax return. "We would get the details of accounts in which more than `2.5 lakh have been deposited. Any mismatch with income declared by the account holder will be treated as a case of tax evasion," Revenue Secretary Hasmukh Adhia warned.
Misreporting of income invites a penalty of 200% of the tax payable under the new Section 270(A) of the Income Tax Act. Those depositing `3-5 lakh will not face too much problems because the tax and penalty will be within reasonable limits. But those with a larger sum may have to pay a huge sum as penalty . The effective tax for someone depositing `20 lakh is 63.5% and it keeps rising as the amount increases (see table). "Under the Income Declaration Scheme which ended on 30 September, they would have paid only 45% tax and no questions asked.Now they will have to answer a lot of questions and pay a higher tax. Even then, there is no immunity from prosecution," says Sudhir Kaushik, Co-founder and CFO of tax filing portal Taxspanner.He points out that the Prime Minister had repeatedly exhorted people to come clean under the declaration scheme.
Chartered accountants and tax con sultants are in high demand as people with cash seek ways to get around the ban on high denomination notes. Tax professionals are charging between 5% and 25% to suggest strategies that can convert unaccounted cash into legitimate money, which can then be safely deposited in the bank account. Here are some of the hacks being used:
SAVINGS OF HOMEMAKER
Cash can be shown as money saved by the housewife out of the monthly household budget. A homemaker can also show a reasonable amount as her personal pocket money . There is no fixed amount mentioned in the tax laws about how much money can be saved like this, but it has to be a reasonable amount and should be commensurate with the total household income and monthly expenses. If the taxpayer earns `80,000 a month and the household expenses are `40,000, his wife should be able to put away `8,000-10,000 every month. Watch out for The tax department would launch a scrutiny if the amount saved exceeds 20-25% of household budget.
INCOME FROM TUITIONS, COOKERY CLASSES
There has been a surge in the number of people who earn from home tuitions or cookery classes. "An income of up to `2.5 lakh a year can be shown as earned from giving tuitions. Tax professionals are encouraging people to file tax returns of the past two years (2014-15 and 2015-16) to make the case more airtight.Tax laws allow delayed returns to be filed and there is a small 1% penal interest charged for every month of delay if there is some tax due. "If the individual has not been filing tax returns, this is a good time to file the previous years' returns and get on track," says Gupta. This will allow such taxpayers to report a higher income this year.
Watch out for
If the income reported is too high, the tax department could scrutinize the returns and ask the assessee to furnish the names of students. In extreme cases, they will also investigate the daily routine of the assessee.
GIFTS FROM RELATIVES
Another common trick is to show the cash as gifts from relatives. Gifts from certain specified lineal relatives are not taxable if the recipient is an adult. However, the amount should be commensurate with the overall economic status of the household. A family with a monthly income of `1 lakh may get cash gifts of about `40,000-50,000 in a year.
Watch out for
If the amount shown as gifts exceeds reasonable limits, tax department may scrutinize source of income of giver.
WEDDINGS AND MUNDANS
Those who tied the knot this year or whose children had their mundan ceremony recently are also in luck. "Weddings and mundans are occasions when gifts from non-relatives are tax-free.They can show the cash as gifts received on these occasions," says Chartered Accountant Minal Agarwal. However, the sum should be commensurate with the overall economic status of the family .Also, this is a double-edged sword. "If the wedding was a lavish affair, the tax department could also ask for the source of the money spent on the wedding," says Kaushik of Taxspanner.
Watch out for
If amount exceeds reasonable limits, tax department may scrutinise givers.
PAY ADVANCES TO WORKERS
Small businessmen, entrepreneurs and even salaried people can pay advance wages to employees and vendors. There is no limit to how much cash can be given out but it should cause any inconvenience to the recipient.
Watch out for
Once given 2-3 months' advance payment, employees may be tempted to switch jobs. Instead, it is better to give loans with proper paperwork.
FOM TIMES OF INDIA
No comments:
Post a Comment