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Mutual Funds - Myths & facts of filing your tax returns

13 Mar 2008

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The fiscal year-end is around the corner and many choose to make tax-related investment decisions around this time. Despite this being a regular, annual ritual, several tax payers have some misconceptions, some of which are listed below:

Misconception No. 1: Filing tax returns is a complex and cumbersome process. I need a Chartered Accountant to help me file my tax returns.

Contrary to popular belief, preparing and filing tax returns is actually quite simple. If you have a digital signature you can accomplish the entire process sitting at home on your computer thanks to the e-filing facility on the I-T website (www.incometaxindiaefiling.gov.in). Alternatively, you can submit the returns online, print a one-page receipt, sign it and drop it off at the income tax office within fifteen days of submitting the returns. No documents are required to be submitted with the receipt. However, if you want help, there are several third party service providers who offer tax preparation and filing services for a fee as low as Rs 200.

Misconception No. 2: The interest I pay on a home loan is deductible from my income from house property up to a maximum of Rs 1, 50,000 per year.

This is true if you have taken a home loan for a single house and it is self-occupied. However, if you take a home loan on a second house, the entire interest paid on the loan can be claimed as a deduction from your income on house property. If you expect that the property would appreciate in value over time, you could take advantage of the above rule. Thus a smart investment strategy would be to take a home loan on a second house, rent out the house and claim interest paid on the loan as a deduction from rental income, thus reducing your borrowing costs significantly.

Misconception No. 3: I receive tax exemption on the actual rent I pay for my rented home.

This is not entirely accurate. Section 13 A of the Income Tax Act states that the maximum amount that is exempt from tax is the lower of the following amounts: (i) the House Rent Allowance given by the employer, (ii) 50% of your basic salary if you live in a metro, (iii) or, actual rent paid minus 10% of your basic salary. If actual rent paid is lower than 10% of your basic salary, you receive no exemption. Also, you cannot claim any exemption under this section if you live in your own house or if you are not paying any rent.

Misconception No. 4: Section 80C benefits are available only on making an investment or saving or paying a premium on insurance.

You can claim a deduction for the school or university tuition fees you pay for your children (maximum of two) provided they are enrolled in a full-time course at any institute in India. In addition, you can claim a deduction for the repayment of principal on any home loan that you may have taken. Both these deductions have to, of course, be within the overall annual Section 80C cap of Rs1 lakh.

Misconception No. 5: If I avail of tax-free medical reimbursement from my employer up to Rs15, 000, I cannot claim deduction on health insurance premium paid.

Tax-free medical reimbursement by your employer up to an amount of Rs 15,000 per year for your family's medical expenditure is separate from the Rs 15,000 deduction available under Section 80D for the premium paid on health insurance. Both these exemptions are covered under different sections of the Income Tax Act. The former covers cost of your daily medical needs and outpatient treatment (OPD), while the latter protects you from expenditure for hospitalization.

Source: www.insuremagic.com BACK