Our efforts at Daily Economics is aimed at simplifying the complex legal and financial jargon and present the information in an easy to understand manner. We have been trying to achieve that objective in all our articles especially in “Know Your Taxes” column. Previously we covered Selection of Correct ITR Form and Common Mistakes in filing Income Tax Returns in as simple English as possible. We received many queries from the readers regarding the TDS and 26AS. Both the articles had plenty of easy to understand pointers in deciphering income tax requirements. We have made a list of more such pointers in filing IT returns.

TDS and IT returns

There is a misconception among some taxpayers that if TDS has been deducted, then there is no need to file IT return or declare the same while filing the IT Return. It is to be noted that TDS is not the final Tax.

As per the provisions of Income tax Act, it is mandatory to file IT return if income is more than basic exemption limit i.e Rs.2.5 lakhs for individuals other than senior citizen and Rs. 3 lakhs for senior citizen. So, if your income is more than the specified limit, you are liable to file IT returns otherwise you will receive notice for non-filing of IT return, and this leads to penalties as well.

The taxpayer should consider the income on which TDS has been deducted and compute the final tax payable. Let us see this with an example for better understanding.

e.g: Mr. Naveen is a resident taxpayer. During the year, he earned fixed deposit interest of Rs. 1,00,000/- from SBI and the bank had deducted Rs. 10,000/- as TDS at the rate of 10%. He is also having income from other heads amounting to Rs. 12,00,000/-. The final tax can be computed as follows:

His total income for the year is Rs. 13,00,000/- (12 lakhs + 1 lakh). Tax on the same is Rs. 2,10,600/- (including cess). He can claim the TDS of Rs. 10,000/- and remaining tax Rs. 2,00,600/- has to be paid.

Since his income is more than Rs. 10 Lakhs, the income is subject to 30% tax slab. Hence the interest income which is earned is also subject to 30% tax. The tax payable on interest income is Rs. 31,200/- (including cess). He can claim Rs. 10,000/- which is TDS deducted by the bank and remaining tax has to be paid.

Reconciliation of information available in 26AS

CBDT has mandated certain persons including government agencies to report to income tax authorities on transactions like sale/purchase of immovable property, investment in securities, cash deposits more than 10 lakhs during the year.

It is imperative for the taxpayer to consider the following:

  • Reconciliation of income
  • Whether TDS claimed is matching with the amount reflecting in Form 26AS.
  • Income from securities have been offered to tax if the same is subject to tax under income tax act like dividends, capital gain on redemption of mutual funds.

If your employer/payer had deducted TDS but if the same is not reflecting  in Form 26AS ensure that the concerned parties files the necessary forms with IT department so that TDS is reflected in Form 26AS before filing the IT return.

TDS credit should be availed in the year in which the corresponding income is offered to tax.

e.g: Mr. Sai has bought a property of Rs. 60,00,000/- from Mr. Manoj and he has given an advance of Rs. 29,70,000/- by deducting Rs. 30,000/- as TDS in the year 2018-19. And in the year 2019-20, they have executed the sale deed and Mr. Sai has paid remaining amount of Rs. 29,70,000/- by deducting additional TDS of Rs. 30,000/-.

Now, Mr. Manoj has to declare income in the year 2019-20 and should claim the entire TDS of Rs. 60,000/- as the sale deed executed in the year 2019-20. He should not claim the TDS of Rs. 30,000/- in the year 2018-19 just because it is deducted and reflecting in 26AS.

There may be instances where some TDS credits are reflecting in Form 26AS which are not related to you, then the credit for same should not be taken.

The tax payer has to comply with requirement while filing the IT return to report the head of income under which income is offered to tax for every TDS credit. It is important that the correct head of income is selected against every TDS credit to avoid receiving notices from IT department for mismatch.

For example, when you are taking a credit for TDS on rental income, then the head of income should be income from house property and not income from other sources. 

Non-disclosure of exempt income

There is a misconception about disclosure of exempt incomes. The taxpayer has to disclose all incomes including exempt incomes. This includes agricultural incomes, savings bank interest, PPF interest and income from mutual funds.

Verification of IT returns

Just filing of IT return, will not end the process. It shall be verified manually or electronically within 120 days of filing of IT return. If you wish to verify manually, then you have to sign and send the IT return acknowledgment to the CPC. An electronic verification can be done through one of the four options, (a) through Aadhaar OTP (b) through net banking (c) through demat account (d) pre-validation of bank account number.

If you do not verify the return within 120 days from the date of filing, then the IT Return will be treated as invalid and considered as if you have not filed the return.  

There are multiple tools and online applications available which are provided by private players and income tax department for filing tax returns online, where information is captured from Form 26AS and Form 16. However, due caution should be exercised by taxpayer before submitting the tax return, particularly those who are filing on their own as the process will be completed instantly. Also, it is important to note that the taxpayer is responsible for all the information provided in the IT return.   

Taxability of Dividends in case of NRIs

Further to the article on NRI residential status, there were a couple of queries raised by the readers on the taxability of dividends.  Here are some of those queries and answers for the benefit of the readers.

  • Are dividends received by NRIs from Indian shares/mutual funds taxable in India?

Till 31 Mar 2020, dividend income from an Indian source was completely exempt in the hands of NRIs. However, from 01 April 2020, such dividends would be taxable in India and NRIs would need to pay tax at applicable rates. If there is a Double Taxation Avoidance Agreement (DTAA/tax treaty) between India and the country of residence, a beneficial rate as per the treaty could be applied. Taking the UK as an example, most dividends are taxed at 10% as per India-UK DTAA. This is subject to the availability of TRC from the country of residence.

  • What is TRC? Is it mandatory to avail treaty relief?

TRC stands for Tax Residency Certificate. This will be issued by the tax authorities of the respective country certifying that the individual NRI is a resident of such country. Most countries have a specific form prescribed for this purpose and an NRI who wishes to avail the treaty benefit would need to apply for the same to the respective country’s tax authorities. As per the Indian tax laws, TRC is a mandatory document required to avail any treaty relief by a non-resident.

  • Is withholding tax/Tax Deduction at Source (TDS) applicable in case of dividends paid to NRIs?

Yes, the dividends paid to NRIs would generally be subject to 20% withholding tax in India. However, the actual tax on dividends may vary depending on the total income of an individual and applicable slab rates. So, the differential taxes would get adjusted at the time of filing the tax return.

  • Can an NRI avail the beneficial rate as per the treaty at the time of tax withholding itself?

Yes. An NRI can avail of the beneficial rate on dividends at the time of tax withholding. In order to avail this, the individual needs to submit the TRC and other prescribed documents to the company. Some companies are contacting individual shareholders to confirm their residential status and other documentation to avail of the treaty benefit. Please ensure that this information is submitted to the companies so that the beneficial rate is availed at the time of withholding itself. In this way, refunds on the tax return could be avoided as well.

  • Can an NRI avail Foreign Tax Credit in his home country on taxes paid on dividends in India?

Generally, yes. However, this may also depend on any specific conditions/documentation requirement specified in the tax treaty or domestic tax laws of such resident country. It is advisable to go through the same and ensure that those requirements are met before availing the credit.

The write-up is for general understanding. We suggest the readers to discuss with their CAs before deciding on tax implications.