Report Other Income in Tax Returns?

When you file your income tax return (ITR), Form 16 issued by your employer may not be the only document you need. The income from selling capital assets, house property and interest on deposits needs to be disclosed in your ITR form. Concealing or misreporting income from these sources is a sure-shot invitation to a tax notice. Tax authorities are tightening the noose around tax offenders. Taxpayers should know that most residual incomes are taxable and they can no longer get away by misreporting them.

A lot of income from investments is tax free but has to be declared. For instance, savings bank interest is tax free to ?10,000 but must be reported under the ‘income from from other sources’ schedule. Even tax exempt investments such as interest from PPF and bonds at time of maturity should be declared under schedule EI (exempt income).

Irrespective of the amount gained or lost, one must disclose capital gains or losses while filing ITR. Here is how you can calculate capital gains from different assets and how to disclose them while filing ITR.

1. Reporting Capital Gains

Profits arising from the sale of capital assets like mutual funds, stocks, gold and immovable property (house or land) are capital gains. Taxpayers have to report capital gains in schedule CG of the ITR forms. Taxpayers who do not have a taxable income but have booked long term capital gains (LTCG) over the basic exemption limit must file their income tax returns.

Capital gains are calculated by deducting the total consideration value (sale value) of the asset with its cost of acquisition (purchase price). However, the method varies across assets. Tax rates on capital gains for different assets depend on whether the gain is short-term or long-term (see graphic). Beyond the minimum holding, period gains are treated as long-term.

A) Gains from Property

LTCG on sale of property enjoys indexation benefit. For arriving at indexed cost of acquisition, multiply the purchase price with the cost inflation index (CII) of the year in which the property is sold and then divide it with the CII of the purchase year. However, if the property sold was bought before April 2001, you have to consider fair market value (FMV) of the property as on 1 April 2001 for calculating indexed acquisition cost.

To calculate LTCG, first calculate the indexed cost of acquisition “by multiplying the cost of acquisition with the notified cost inflation index (CII) for the year of sale and dividing this by CII of the year of purchase. But if the asset was bought before 2001, then you need to use the fair market value (FMV) as on 1 April 2001 and then calculate the indexed cost of acquisition. For instance, if the property was bought in 1995, you need to calculate the property’s FMV as on 1 April 2001 and then arrive at the cost of acquisition.

B) Gains from Gold, Gold bonds

Capital gains on gold have to be reported in ‘sale of other assets’ section. Just like debt and real estate, LTCG on gold investment also gets the benefit of indexation. Gains made on selling any form of gold are taxed at the same rate. However, sovereign gold bonds (SGBs) enjoy a special tax benefit. If held till maturity of eight years, capital gains on SGBs are tax free. If sold before maturity, the tax treatment is same as gold funds. Also, interest from SGBs is taxable.

C) Gains from Stocks and Funds

This year onwards, LTCG above Rs 1 lakh made on sale of equity investments will be taxed. Long-term gains on your stocks or equity funds till 31 January 2018 are grandfathered and, hence, will be tax-exempt. Due to the grandfathering clause, reporting long term gains on equity investments is quiet complex.

But from next AY i.e. 2019-20, LTCG will be taxed. Because, the Finance Act, 2018 withdrew the exemption granted under Section 10(38). A new section, 112A, was introduced with effect from 1 April 2018. It provides that LTCG from equity exceeding ? 1 lakh per year shall be taxable at the rate of 10% (plus applicable surcharge and cess) without any indexation benefit.

2. Reporting Rent Income

Rent income from any house property apart from one self-occupied house has to be declared under income from house property head. If the second house is vacant, it is treated as ‘deemed to be let out’ and you will have to report notional rent in your ITR returns. Municipal value refers to the rent determined by the municipal authority under whose jurisdiction the property falls. Fair rent is the rent of a similar property in that location whereas standard rent is fixed under the Rent Control Act (if applicable) beyond which landlord is not allowed to charge. Higher of municipal value and fair rent is compared with the standard rent, from which the lower amount is taken to be the deemed rent.

Please note that in the case of a jointly owned property, the rental income is taxable in the hands of each co-owner in proportion to the share of each owner. Rent and municipal taxes should be split according to the ownership share mentioned in the agreement. If the share is not specified, then it is split equally between the joint owners.

3. Income from Other Sources

So, let’s find out what all is considered to be “income from other sources” that must be reported while filing ITRs. The following are the income to be considered from other sources:

1. Incomes that Form Part of Tax Returns

The IT department categorizes different kinds of income including income from salary, housing property, capital gain/loss, business and profession, and income from other sources. Any income which can’t be included under income from any of the income heads is taken into account under the “income from other sources” category. So, let’s find out some of the common incomes that fall under this category:

2. Interest on a Savings Account

The income earned as interest from savings accounts is not fully taxable. The I-T Act allows a deduction under Section 80TTA up to Rs 10,000 on interest from savings accounts. However, even if you have not crossed the threshold of Rs 10,000 you should show the income while filing the ITR. In ITR-1 there is a space to report the exempt income—you can disclose interest from a savings account in that section.

3. Dividend Income

Income earned from dividend up to Rs 10 lakh in a financial year is exempt under Section 10(35). Some people make a mistake by not reporting it due to which they get a query from the I-T Department later. The dividend income can be shown in Part-D of the ITR 1 form under the “exempt income”.

4. Tax Refund Along With Interest on It

If you have received a tax refund along with interest during the relevant financial year, you must report it while filing the ITR. The tax refund is not taxable, but the interest earned on such refund (if any) needs to be included as taxable income. You can check the tax refund amount in Form 26 AS.

5. Family Pension

The pension amount received by the dependent of a government employee is known as family pension. It is considered as the income from other sources in the hand of the receiver. If the taxpayer has received family pension, she must include it while filing the ITR.

Many people work in cities and also earn agricultural income from their native places. If the agricultural income is less than Rs 5,000, you can file the ITR 1. However, if it exceeds Rs 5,000 threshold, you need to file ITR 2 to report such income. Always report such income while filing the ITR whether it is exempt or not.

6. Income from Salary Along With Income under the Other Heads

Apart from income from other sources, salaried people may also get income under other heads. Usually, in such cases, the salaried taxpayers become ineligible to file the ITR 1, and they have to select the appropriate ITR form. For example, if a salaried taxpayer has got income from more than one housing property then ITR 1 does not apply to them. If the salaried person also works as a freelancer, that income will come under business and profession, and even then the salaried person is not eligible to file ITR 1.     

In conclusion, it may get a bit confusing for some taxpayers to assess their income from other sources while filing ITR. It’s safer to consult a tax advisor if you get stuck at any point. That being said, since the last day to file FY2018-19 ITRs for individuals, Hindu Undivided Families, BOIs and AOPs without having to pay any penalty is July 31, it makes sense to file your returns at the earliest to avoid any last-minute glitches.

Disclosing Gains in ITR

Once you have figured out what your capital gains or losses are, the next step is to include them in your ITR form. There are different ITR forms based on the type and amount of income. Individuals with income from salary and capital gains are required to fill ITR-2.

This AY 2018-19, you are required to put the details and break-up of each income in your return, including capital gains. The requirements regarding capital gains in ITR-2 are extensive and depend upon the type of asset sold and period of holding, whether it is a long-term capital asset or a short-term capital asset. Generally, the details to be disclosed are the date of sale and purchase, purchase amount, sales consideration, type of asset, transfer expenses and so on. If the capital asset is a security, you need to furnish additional information like whether STT is paid or not, whether it’s listed or unlisted.

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