Should you disclose Tax Free Income / Exempted Income in your ITR?
You might be getting tax free income / Exempted Income from various investments in the financial year. However, many of us would not disclose / indicate them in income tax return. What are tax free investments and what are the tax implications for not disclosing tax free income / exempted income from such investments in your ITR? Are there any benefits of indicating exempted income in your ITR?
What are tax free investments in India?
Tax free investments are those where the returns or income from such investment options are not taxable. There are several tax free investments like tax free bonds, long term capital gains from stocks and equity mutual funds, etc., Income received from such investments are tax free. Hence we generally does not worry that this should be disclosed in income tax returns (ITR).
What are various tax free incomes / exempted incomes in India?
Some of the major tax free incomes are indicated below.
- Income received from tax free bonds.
- Long term capital gains from selling stocks and equity mutual funds are tax free (after 1 year).
- Dividends received from stocks.
- Dividends from MIP mutual funds.
- Interest from Public Provident Fund, EPF, VPF is tax free at maturity
- Maturity amount of insurance plans is tax free.
- Gift tax upto specific amount.
What are various other incomes where you might not have to pay tax?
- Capital gains received through the sale of property and during computation of indexation, you might not get any capital gains and need not pay tax.
- Capital gains received from debt mutual funds and while the computation of indexation, you might not get any gains and need not pay income tax.
- …. So on.
Should you disclose tax free income or exempted income in your income tax return (ITR)?
Yes, you should disclose them in tax free income or exempted income in respective column (s) in your income tax return (ITR). There is no tax liability / penalty for not disclosing tax free income in your ITR. However there are several benefits of disclosing them in ITR.
- You should be disclosing them in your ITR and this would indicate a pure white money from a legal point of view.
- Large amount of deposits in your bank account would create a suspicious transaction in the eyes of Income Tax (IT) Department. They would call you for detailed scrutiny of all your accounts and transactions if they find any such large deposits.
- Disclosing tax free income would help you be tension free in the future as you are disclosing them up front from where you are getting such large amounts of income. You can use such large amounts later on without any worry.
Example No.1 – Sale of stocks which you brought several years back
You are selling some stocks which you bought several years back and deposited/ transferred Rs 1 Crore in your bank account. Since these are long term capital gains, they are tax free. Later on, assume that you are investing in mutual funds or buying a residential property. From your eyes, these are pure white money. However, you should indicate such large sums received through the sale of stocks in ITR which is tax free. This way, you are ensuring that you are recording transactions legally and in the future, you may not have issued from income tax department.
Example No.2 – Sale of debt mutual funds which you brought 3+ years back
You brought debt mutual funds more than 3 years back. You have sold them now. You have computed indexation benefit and found that you need not pay tax now. You can disclose such tax free income (selling proceeds minus investments made) in your ITR. Note that I am talking about income and not deposit here. If you have invested Rs 1 Lakh and get Rs 1.2 Lakhs, Rs 20,000 should be diclosed in tax free income (if exempted from tax) and not Rs 1.2 Lakhs.
Conclusion: Disclosing tax free income / exempted income in ITR would help you to be tension free. Any large deposits in your account should be properly recorded and indicated in your ITR to avoid any issues in the future.
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Should you disclose tax free income in your income tax return (ITR)
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