Salaried individuals often make two big mistakes in their Income Tax Returns: First is they claiming wrong exemptions for unallowed allowances and Second is converting salary income into professional receipt under section 44ADA.
Penalties for Income Misreporting
Under-reporting income may apply a penalty of 50% of the tax due.
Misreporting, such as showing salary as professional income, can result in a penalty of up to 200% of the tax, along with the actual tax and addition interest.
Recommendations for Salaried Individuals
Always report income under the correct head—‘Salary’ for salaried employees.
Check important documents for calculation of salary like Form 16, salary slips, 26 AS, AIS or TIS.
Most important is Form 16 which is provided by employer - either calculation done in old or new tax regime.
But most of the allowances, including HRA, Leave Travel Concession, Entertainment Allowance, Professional Fees, Professional Tax or any Special Allowance are not allowed under new tax regime. Only specific basic allowances are permitted such as:
- Conveyance allowance, if actual expenses are incurred and the company allows it upon bill submission.
- Daily allowance, for tour and transfer purposes.
- Transport allowance, exclusively for disabled persons.
Many individuals claims such amounts under "other allowances claimed u/s 10(14)" without proper documentation to reduce tax liability or increase refunds, which may lead to 200% penalty on the undeclared tax.
Converting Salary to Professional Receipts
Some salaried individuals may advised to convert their salary into professional income, getting TDS deducted u/s 194JB, to take the advantage of presumptive taxation benefits under Section 44ADA to show only 50% as profit and the rest as expenses
For employees who do not have any actual expenses, showing 50% profit is incorrect as it is not valid for employees (like teachers, corporate professionals) who do not have significant professional expenses.
The 50% profit rule under 44ADA is primarily for those with actual expenses, intended to exempt them from mandatory audits if they declare at least 50% profit.
Tax Evasion Example
A salaried person with ₹10 lakh income might may have to pay ₹105,000 tax under the new regime. If they declared ₹14 lakh as professional gross receipts as fake and claimed 50% i.e., ₹7 lakh as expenses without any actual expenditure, their taxable income becomes ₹7 lakh, resulting in zero tax.
Note
If there are no actual expenses, means the entire ₹14 lakh must be considered income profit. Such actions can lead to a 200% penalty on the tax levied on the under-reported amount.
Conclusion
Always claim only actual expenses and allowances as permitted by Income Tax Law. Ensure that the correct income head is declared to avoid severe penalties.
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