Common Mistakes To Avoid While Filing Income Tax Returns

With the income tax filing deadline approaching, the Income Tax Department has made it easier for taxpayers by making three relevant forms – ITR-1, ITR-2, and ITR-4 – available online, with pre-filled data.

These forms have streamlined the tax filing process and reduced the burden on taxpayers to manually enter all their financial details.

One crucial document that most employees must have received is Form 16, which is essential for filing taxes. Form 16 provides details of the income earned and the tax deducted at source by their employers during the financial year. Many employees have already filed their returns, having the advantage of Form 16 to avoid a last-minute rush.

The last date for filing income tax returns for the assessment year 2023-24 is 31 July, and there are no expected extensions this year. Most of the employees must have received Form 16 – an important document for filing taxes – and many have already filed it to avoid a last-minute hurry.

It is a human tendency to make mistakes, and taxpayers often make errors when filing income tax returns. Some common mistakes include missing deadlines, submitting incorrect or incomplete information, choosing the wrong filing status, making math errors, underreporting income, incorrectly claiming deductions/credits, failing to save records, forgetting to sign and date the return, providing incorrect direct deposit information, neglecting to update personal information, and not seeking professional help when needed.

Here are the most common mistakes that taxpayers make, and some tax experts have listed a few mistakes to be avoided.  

Avinash Shekhar, Founder & CEO of TaxNodes, explained that one of the most frequent errors taxpayers make while filing ITR is inaccurately reporting income. Taxpayers may inadvertently omit or underreport certain sources of income, such as freelance earnings or income from side gigs. This can occur due to a lack of understanding of what constitutes taxable income or simply an oversight. Failing to report all sources of income can lead to penalties, audits, and potential legal consequences.

It is most common that taxpayers are ignoring/not paying heed to all the transactions that might have happened in a fiscal year. “We've seen folks look at AIS (annual information statement) over the past couple of years to file their taxes. AIS, though, need not have all details pertaining to a certain user's transactions/capital gains in a year. This leads to incorrect IT return filing,” said Raghuram Trikutam, CEO of Descrypt.

Importance Of Accuracy
Submitting inaccurate information on your tax return can have various consequences. The Income Tax Department in India, managed by the Central Board of Direct Taxes (CBDT), enforces financial laws. "Errors in your Income Tax Return (ITR) can lead to delayed refunds or additional tax payments with interest, elucidated Aryaman Vir, CEO, Aurum WiseX.

Serious inaccuracies may prompt a thorough review of your financial details by the tax department, potentially resulting in fines and penalties.

In extreme cases, fraudulent information could lead to legal action under the Indian Penal Code. Hence, accuracy and honesty are vital when reporting taxable income in India.

Complex Financial Situation
Proper documentation has become a need of the hour. Failing to maintain proper documentation can harm tax filing accuracy and compliance. "It can lead to misreported income, inaccurate deductions, and credits claimed, as well as complications during audits. Non-compliance penalties, like Section 271A in India, may be imposed for inadequate account maintenance. Additionally, rectifying errors in filed returns would be difficult without relevant documentation. Therefore, ensuring accurate and comprehensive record-keeping is crucial for a seamless tax filing procedure," said Vir.

Individuals with complex financial situations or multiple income sources should take extra care to minimize the risk of errors in their tax filings. In such cases, seeking professional assistance from accountants, tax advisors, or enrolled agents can provide specialised knowledge and ensure accurate reporting while maximising eligible deductions and credits.

By understanding these common pitfalls, staying organised, utilising available resources, and remaining updated on tax regulations, taxpayers can navigate the complexities of income tax filing with greater accuracy, ensuring compliance and avoiding unnecessary penalties or audits, added Shekhar.

On the other hand, Trikutam explained that the best way to do this is by maintaining correct records of all financial information that an individual might possess. Thankfully, digitisation in the field has led to these records being maintained at the source end in a lot of cases. For instance, your savings bank interest/FDs, etc., are records maintained by banks/financial institutions in a digitised format. The same is the case with your stocks and MF investments. The ones which you need to pay specific heed to are real estate investments, or alternate asset classes such as VDAs.

In the event of a mistaken filing, a taxpayer needs to rectify the error by amending the tax return (ITR2 in individual cases) and filing the same within three years of the due date of the original return. If the amendment leads to the taxpayer having to pay additional taxes, they must do so through a challan along with the penalty. In a few cases, the ITD might provide a penalty waiver, which the taxpayer will have to request. If the taxpayer believes that the error is made by ITD, they can request an adjustment in the subsequent tax return.