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The tax department is turning the heat on taxpayers who don’t report interest income. Don’t be under the misconception that interest earned is tax-free.

Preparing to file your tax return?

Make sure you have included all the interest income earned dur ing the year. Although interest earned from infrastructure bonds, fixed deposits and recurring deposits is fully taxable, taxpayers often ignore this income in their returns. “This is a common misconception. Almost nine out of 10 taxpayers go wrong in reporting their interest income,“ says Sudhir Kaushik, Co-founder of Taxspanner.com.

Almost 30% of the respondents to an online survey conducted by ET Wealth last year believed that the interest from infrastructure bonds and tax-saving fixed deposits was taxfree. Taxpayers also confuse the exemption for savings bank interest under Sec 80 TTA.Almost 29% of the respondents believed that interest of up to `10,000 from bank FDs is tax free in a year.

There is also a misconception that there is no need to report the income if the bank has deducted TDS. But TDS is only 10%, and if your income puts you in the 20% or 30% tax bracket, you have to pay additional tax. Of course, if the income is below the basic exemption limit, the TDS will be refunded when the investor files his return.

These mistakes can put taxpayers in a tight spot now. In a circular issued last week, the Central Board of Direct Taxes has asked taxpayers to correctly declare the interest income they earned during the year in their tax returns. “Such interest income should be shown in the return of income even in cases where Form 15G or 15H has been filed if the earning is not exempt under Section 10 of the Income-tax Act and the total income of the person exceeds the maximum amount not chargeable to tax,“ says the circular. For taxpayers up to 60 years, an income of `2.5 lakh a year is not taxable. For senior citizens the limit is higher at `3 lakh.

Don’t think you can avoid reporting your interest income. If the interest exceeds `10,000 in a year, the bank or bond issuer will deduct TDS and credit it to your PAN number in your Form 26AS. If you don’t mention that TDS (and the income on which it was deducted) in your tax return, the computerised surveillance system in the tax department will immediately pick up the discrepancy.“Last year, the tax department sought information of all bank accounts held and taxpayers should not forget to include saving account interest from all of these in their tax returns. If you miss any, it amounts to concealment of information,“ says Archit Gupta, founder and CEO, ClearTax.in.

While Form 26AS shows only the TDS, the department can also track other deposits and interest payments received without TDS.“Information regarding interest earned by individuals and business entities on term deposit is filed with the Income Tax Department by banks including co-operative banks and other financial institutions and state treasuries,“ warns the circular.

Taxpayers should also note that the 10-figure alphanumeric PAN is under constant surveillance by the department. Almost every financial transaction requires PAN. Whenever someone makes a high value transaction or investment, it is mandatory for the bank, mutual fund, brokerage or credit card company to report it to the Income Tax Department.“Tax officials can peek into your financial life by just keying in 10 figures into their computerised database,“ says Delhi-based chartered accountant M.K. Agarwal.