With the financial year coming to an end, do you fear the upcoming tax season? Do you find yourself struggling to calculate your tax liability? Do you wish a magic tool could do this task for you? Well, there is! A tax calculator is a tool that allows you to estimate your taxes based on your income, deductions, and exemptions. Sounds interesting, right?
But wait, there is a catch. A tax calculator is only as useful when you give the right inputs. If you make some common mistakes when estimating your taxes, you might get a nasty surprise when you file your return.
Do you know that filing incorrect tax returns can result in severe penalties such as imprisonment? Yes, you heard me correctly! That is why you should exercise caution and avoid making these common mistakes when using tax calculators.
What is a Tax Calculator?
Tax Calculator simply is an online tool that helps you calculate your net income and tax liability after taking into account various deductions, exemptions, and rebates that are available under the Income Tax Act. You can use this tool to plan your investments and savings and optimize your tax outgo.
Inputs Required in A Tax Calculator
Some of the common inputs are:
Basic details: Your age, residential status, financial year, and assessment year. These details help determine your applicable tax slab and rates.
Income details: Your income from various sources, such as salary, house property, capital gains, business or profession, and other sources. These details help calculate your gross total income.
Exemptions: The amount of income that is exempt from tax, such as HRA, LTA, EPF, gratuity, etc. These details help reduce your taxable income.
Deductions: The amount of investments or expenses that are eligible for tax deduction, such as 80C, 80D, 80G, 80E, 80TTA, etc. These details help lower your tax liability.
Tax credits: The amount of tax that has been already paid or deducted, such as TDS, TCS, advance tax, self-assessment tax, etc. These details help adjust your final tax payable or refundable.
How to use a tax calculator correctly?
Here are some tips on how to use a tax calculator properly:
1. Choose a tax calculator that suits your needs
You can choose a tax calculator based on the complexity of your income calculations. For example, if you are self-employed, you might want to use a specialized tax calculator that can handle your business income and expenses.
If you only have salary income, you might prefer a simple tax calculator that only asks for your basic information.
2. Enter your information carefully and completely
The utility of a tax calculator is limited to the data you enter. Make sure to enter your income, deductions, and loans accurately and honestly.
Don’t forget to include any additional sources of income you may have, such as interest, dividends capital gains etc. Also, don’t miss out on any loan obligations you have.
3. Check the results for errors or inconsistencies
A tax estimator can help you estimate your tax liability, but it is not a substitute for professional tax consultants.
You should always review and compare the results to previous tax returns, pay slips, and bank statements.
Common sources of income and deductions that people miss or miscalculate
Here are some of the most common sources of income and deductions that people miss or miscalculate:
Self-employment income
You may be working as a freelancer, contractor, or consultant, you need to report your self-employment income and pay self-employment tax on it. You also need to deduct your business expenses, such as equipment, supplies, travel, or home office.
However, many people either forget to include their self-employment income, or overstate or understate their business expenses, which can result in paying too much or too little tax.
Capital gains
If you sell any assets, such as stocks, bonds, or property, you need to report your capital gains or losses on your tax return. You also need to distinguish between short-term and long-term capital gains, which are taxed at different rates.
However, many people either fail to report their capital gains, or mix up the holding periods, which can lead to paying the wrong amount of tax.
Alimony
If you pay or receive alimony as part of a divorce or separation agreement, you need to report it on your tax return. The payer can deduct the alimony payments, while the recipient must include them as income.
However, many people either neglect to report their alimony, or confuse it with child support, which is not taxable or deductible, which can cause tax problems for both parties.
Charitable donations
If you make any donations to qualified charitable organizations, you can deduct them from your taxable income. You need to keep track of your donations and provide proof of them when filing your tax return.
However, many people either forget to keep receipts of their donations or claim more than the actual amount they donated, which can result in overstating their deductions and underpaying their taxes.
Tax Blunders: How to Avoid the Top 5 Pitfalls of Tax Estimation
Here are the top five tax blunders that you should avoid at all costs:
1. Not choosing the right tax regime
The government has introduced two tax regimes – the old one with higher tax rates but more deductions and exemptions, and the new one with lower tax rates but fewer deductions and exemptions.
Don’t blindly follow the new regime just because it has lower rates, or stick to the old one just because you are used to it. Choose wisely and save more.
2. Not declaring all your income sources
You might have income from various sources, such as salary, house property, capital gains, business or profession, and other sources. You need to declare all of them in your tax return, even if they are exempt or below the taxable limit.
If you fail to do so, you might face penalties and interest for under-reporting or concealing your income. Don’t fall into this trap and be honest and transparent.
3. Not claiming all your deductions and exemptions
You might be eligible for various deductions and exemptions that can reduce your taxable income and tax liability. These include investments under section 80C, health insurance premiums under section 80D, donations under section 80G, education loan interest under section 80E, and many more.
You need to claim them in your tax return and provide the relevant proofs and documents. Don’t miss out on any of these tax-saving opportunities, make the most of them.
4. Not paying advance tax on time
You need to pay advance tax if your tax liability exceeds Rs. 10,000 in a year, and you don’t have enough TDS or TCS deducted from your income.
You need to pay advance tax in four instalments – 15% by June 15, 45% by September 15, 75% by December 15, and 100% by March 15.
If you fail to pay advance tax on time, you might have to pay interest and penalty for late payment of tax. So, be punctual and disciplined.
5. Not verifying your tax return and refund status
After filing your tax return, you must verify it either online or offline within 120 days of filing. If you do not verify your tax return, the tax department will not process it, and you will not receive a refund or acknowledgment.
You should also check the status of your refund online to see if there are any discrepancies or delays. If there is an issue, you must contact the tax department to resolve it. Do not ignore your tax return or refund status; instead, be proactive and vigilant.
The Bottom Line
Tax estimation is a crucial but challenging task for taxpayers, especially those with multiple income sources, deductions, and exemptions. Many common mistakes can lead to inaccurate tax estimation, resulting in penalties, interest, or refunds from the tax authorities.
A tax calculator can help you avoid common mistakes in tax estimation by providing a clear and comprehensive breakdown of your income, deductions, and tax payable.
It can also help you compare different scenarios under both tax regimes and optimize your tax savings. By using a tax calculator, you can ensure that you pay the right amount of tax at the right time, and avoid any hassles or surprises later.
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FAQ
How do I file my taxes if I have multiple income sources?
Begin by gathering all relevant documents, such as Form 16, Form 26AS, bank statements, and so on, from each source of income. Then, select the ITR form that corresponds to your income type and tax regime.
Add up your income from all sources, deduct any applicable exemptions and deductions, and calculate your tax liability.
You can use any of the online tax estimators to calculate and file your taxes. Alternatively, you can seek guidance from a tax professional.How do I file my taxes if I have income from stock trading?
First, you need to determine whether your income from stock trading is classified as capital gains or business income.
Second, you need to identify whether your capital gains are short-term or long-term in nature.
Third, you need to calculate the amount of tax that you have to pay on your income from stock trading.
Lastly, the tax will be calculated according to the nature of income-
STCG from equity shares are taxable at 15%, irrespective of your tax slab.
LTCG from equity shares are taxable at 10% if they exceed Rs. 1 lakh in a financial year.
Business income from intraday trading is taxable as per your tax slabWhat are the penalties for late or incorrect filing of ITR?
A late filing fee of Rs. 5,000 under section 234F applies if you file your ITR past the due date, which is normally July 31st. But the fee is only Rs. 1000 if your total income is less than or equal to Rs. 5 lakh.
If you fail to file your ITR at all, you may face prosecution under Section 276CC, which can result in imprisonment for 3 months to 7 years and a fine, depending on the amount of tax evaded or owed.
If you underreport or misreport your income, you must pay a penalty of 50% or 200% of the tax payable on that income. So, using the right tax estimators can help you evade these penalties.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.