ITR filing: Claiming Tax Deductions Without Proofs Can Backfire, Warn CAs (2023)

Tax deduction claims: Annual Information Statement (AIS) captures all income details, leaving no room for tax-payers to hide. Yet, chartered accountants say even salaried tax-payers approach them with requests to avail of deductions – at times, not legitimate – at the time of filing returns in order to claim tax refunds.

Salaried tax-payers’ return-filing has turned more complex

Imagine this scenario: You forgot to provide the necessary documents to your employer in January or February to claim exemption on your house rent allowance (HRA) during the investment declaration filing period. Consequently, your employer deducts more tax (known as tax deduction at source) from your salary.

But here’s the good news: you can still claim a refund for the extra amount deducted when you file your income tax return (ITR). You can proceed with the filing without submitting any proofs like rent agreement or rent receipts since these documents are not required to be attached while filing returns.

So far so good, as long as you preserve the records of rent agreements and receipts.

No Documentary Evidence, No Tax Deduction

However, it is common for salaried employees to seek assistance from chartered accountants to file refund claims, even if they do not have supporting documents to substantiate their claims.

According to Nagachandra Reddy, a chartered accountant based in Hyderabad and the Founder of Somu & Associates, there are cases where salaried employees seek guidance on claiming refunds based on deductions from sections like 80DDB, 80U, and 80G. However, when asked to provide the necessary documents for filing their returns, many individuals are unable to do so.

Although Reddy states that he has declined to assist such cases, some employees may still choose to file their returns independently in the expectation of receiving tax refunds. Section 80G allows for deductions of 50-100 percent on donations made to approved charitable institutions, while individuals with disabilities can claim deductions ranging from Rs 75,000 to Rs 1.25 lakh, depending on the extent of their disability, under section 80U.

According to Reddy, there is a chance that the income tax department may process such returns and issue tax refunds. However, these cases are likely to attract scrutiny or notices from the department around six months to one year later. Individuals who claim deductions without proper evidence could find themselves in a difficult situation at that point. Reddy suggests that it would be ideal for the income tax department to raise queries during the processing stage of the income tax return to prevent such activities from occurring.

It’s a good practice to preserve your documents even after your income tax returns are processed as you could receive a notice in future seeking evidence to back your ITR data.

The Annual Information Statement (AIS) shows information provided by entities like employers, banks, mutual fund houses, and registrars. This statement makes it challenging for individuals filing their returns to manipulate the details they have entered in their return forms.

“AIS captures information that may have been overlooked intentionally or unintentionally. So, if there is any lack of transparency in disclosing income or claiming deductions, it can create problems in the future,” explains Chetan Chandak, Director of TaxBirbal. Chartered accountants advise that it is better to be honest rather than trying to take advantage of any loopholes in the system.

Also Read: E Filing Income Tax: How to Fill ITR Online For First Time

Salaried Individuals’ ITR Filing Now More Complex

The increasing popularity of financial investments, such as mutual funds and stocks, has led to financially knowledgeable employees having capital gains and profits from equity trading that need to be declared. According to chartered accountants and tax professionals, this has made the process of filing returns more time-consuming.

“The Annual Information Statement (AIS) now shows all sources of income for individuals. Previously, some individuals would deny earning interest on their savings accounts or any capital gains from shares or mutual funds. However, with the AIS capturing these transactions and income sources, we now require more detailed documentation after reviewing the AIS. This often leads to a more cumbersome process involving back-and-forth communication between the chartered accountant and the client,” explains Chandak.

Over the past three years, a significant number of salaried individuals have been actively participating in stock market trading, especially in the futures and options (F&O) segment. As a result, there is now a requirement for detailed disclosures and the use of form ITR-3, specifically designed for individuals with income from business and profession.

“The tax filing process has become more complicated as salaried individuals now have multiple sources of income, including capital gains and trading gains from the F&O segment. Additionally, employers issue Forms-16 only by June 15, leaving a limited window of 45 days to complete the filing process. This time constraint increases the risk of making mistakes due to rushing. We have repeatedly requested the government to extend the due date to August 31, but it seems unlikely that our appeals will be granted,” explains Reddy.

Tax Compliance Burden Up Despite Extensive Digitisation

Although the ITR filing forms come with pre-filled information on incomes, TDS, deductions, and more, they often contain errors and cannot be completely trusted. Salaried individuals who invest in mutual funds are subject to capital gains tax on the sale of units during the year.

“Financial transactions are linked to PAN numbers, but there is often duplication in reporting. For example, both a mutual fund house and CAMS may report the same transaction to the income tax department. This can result in the transaction being displayed twice in the Annual Information Statement (AIS), making it crucial but challenging to reconcile the sale value as reported in AIS with the capital gain reports from brokers and RTAs (registrar and transfer agents), especially when there are multiple accounts,” highlights Chandak.

Additionally, the capital gains data recorded in the Annual Information Statement (AIS) may not have a standardized format. “The reporting format for capital gains varies among entities like brokers, CAMS, and NSDL. For example, the date format may differ, making it challenging for our software applications to directly import the data. As a result, we have to manually enter the data points to ensure accurate computation of capital gains, especially for grandfathered long-term capital gains,” he explains.

On one side, the process of filing tax returns has become lengthier due to the increased burden of compliance and the growing number of financial transactions among salaried individuals. On the other hand, the time available to complete the filing has significantly reduced. Several chartered accountants are advocating for an extension of the July 31 deadline, although based on past experiences, it appears unlikely that the government will accommodate this request.

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