Common Myths About Income Tax in India

 Common Myths About Income Tax in India

A surprising number of people hold mistaken beliefs about who must file taxes and what income is taxable in India. For example, some assume that earning below the exemption limit means you can skip filing a return. But even if you owe no tax under Section 87A (recently raised so income up to ₹7 lakh in the new regime has zero tax), the law may still require you to file if your gross income exceeds the exemption limit. Certain conditions – like holding foreign assets, having large bank deposits, or high travel/electricity expenses – can force an ITR even with low income. Below we debunk several popular myths and explain the truth under current Indian tax laws.

Filing Requirements and Thresholds

• Myth: “I don’t need to file an ITR if my income is below the taxable limit or I owe no tax.” Fact: Not always. Under the law, any resident with total income above the basic exemption must file ITR. (This is ₹2.5 lakh for those <60 years in the old regime, ₹3 lakh under the new regime.) Even if a Section 87A rebate makes your tax liability zero (for example, up to ₹7 lakh under the new regime), you still must file if your gross income exceeds the exemption threshold. Additionally, having foreign assets or large transactions (e.g. bank deposits ≥₹1 crore, or TDS ≥₹25,000) triggers a filing requirement regardless of low income. In short, “no tax due” does not automatically mean “no return required.”
• Myth: “Only salaried employees (with Form 16) need to file ITR.” Fact: Anyone whose income exceeds the limit must file – this includes self-employed individuals, freelancers, pensioners, and business owners. Relying on Form 16 from an employer is not mandatory. You must report all sources of income (salary, rent, interest, capital gains, etc.) in your return, even if you don’t receive a Form 16.
• Myth: “If TDS (Tax Deducted at Source) is already deducted, I don’t need to file a return.” Fact: TDS is not a substitute for filing. Even if tax was deducted on your salary or interest, you must file an ITR if your total income exceeds the exemption limit. Filing is needed to reconcile taxes – for example, to claim refunds when excess TDS was deducted or to carry forward losses.

Income and Deduction Myths

• Myth: “Interest income and monetary gifts are entirely tax-free.” Fact: Most interest (savings account, deposits, etc.) is taxable under “Income from Other Sources,” though small deductions apply (up to ₹10,000 under Sec 80TTA, ₹50,000 for seniors under 80TTB). Likewise, gifts from specified relatives or on marriage are exempt, but gifts above ₹50,000 in a year from non-relatives are taxable as income. (For instance, if friends gift you ₹80,000 in total, the entire amount is taxed in your hands.) Any income or profit earned from a gift (like interest on a gifted sum) is also taxable.
• Myth: “I can’t claim any tax deduction on house rent if my employer doesn’t pay HRA.” Fact: Not true. If you pay rent but do not receive HRA from your employer, you can still claim a rental deduction under Section 80GG by filing Form 10BA. Certain conditions apply (e.g. you must not own a self-occupied home at your workplace), but eligible taxpayers can reduce taxable income even without an employer-provided HRA component.
• Myth: “I only need to mention one bank account in my ITR.” Fact: You should report all bank accounts held during the year. Failing to disclose any account can delay refunds or invite queries from the tax department. Always ensure your Income Tax Return lists every active bank account so that refunds (if any) go to the correct account.

Tax-Saving Investment Myths

• Myth: “I can invest more than ₹1.5 lakh in tax-saving schemes to reduce my tax.” Fact: The aggregate deduction under Section 80C (covering instruments like PPF, ELSS, life insurance premiums, etc.) is capped at ₹1.5 lakh per year. Investing ₹2 lakh in PPF won’t give extra deduction beyond ₹1.5 lakh – the excess doesn’t lower your taxable income. Plan your investments so the full ₹1.5 lakh limit is utilized, but don’t assume you can push more to cut taxes. (Also note: under the new tax regime, many deductions including 80C are not allowed.)
• Myth: “Investing in insurance/endowment plans is the best way to save taxes.” Fact: Insurance’s main purpose is protection, not high returns. Many people buy endowment or ULIP plans solely for the 80C benefit, but these often lock in funds and yield poor returns. Financial experts advise buying pure term insurance for risk cover and then investing separately (e.g. via SIPs in equity ELSS funds) for better growth. In other words, don’t let tax-saving goals drive you into unsuitable products.
• Myth: “I only need to invest at the last minute of the financial year to save taxes.” Fact: (While not strictly a legal myth, this is a common mistake.) Procrastinating on tax planning can backfire: you may make hasty, suboptimal choices. It’s better to plan tax-saving investments early in the year, so you benefit from longer compounding (for PPF/FDs) or disciplined SIP investing (for ELSS).

Audits and Compliance Myths

• Myth: “E-filing my return or hiring a tax professional guarantees I won’t be audited or get a notice.” Fact: No system is foolproof. In fact, e-filing feeds your data directly into the government’s system (Form 26AS, AIS/TIS), making it easier for mismatches or red flags to be caught. Anyone can be subject to scrutiny if inconsistencies arise. Also, simply filing online isn’t the last step – you must verify the return (usually by OTP or sending a signed copy) within the prescribed time (e.g. 30 days). Failing to verify means your return is invalid. After filing, keep track of your ITR status and promptly respond to any notices; neglecting these steps can lead to penalties or reassessment.
• Myth: “If I don’t file an ITR or pay a small tax on time, nothing will happen.” Fact: This is dangerous. The tax department has wide powers to penalize non-compliance. Even if you think the income is low, failing to file can cost you: late filing attracts fees (₹1,000 to ₹5,000) and interest on due tax. In serious cases of tax evasion or large unpaid tax, authorities can freeze bank accounts or attach property. Moreover, not filing can block refunds, prevent loss carry-forwards, and even raise flags when applying for loans or visas. Always file returns on time to avoid penalties.

Each of these myths can lead taxpayers astray. It’s best to rely on current tax rules and official guidance rather than hearsay. When in doubt, consult the Income Tax Act or a qualified tax professional – and remember that honest mistakes are common, but staying informed and compliant avoids trouble later.

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