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New tax form: What to do

June 20, 2006 17:15 IST

If you are happy filing your tax return using the one-page, Naya Saral Form 2E, then there's bad news for you. The Central Board of Direct Taxes (CBDT) has introduced a new four-page Form 2F to replace the existing one from 31 July.

As per the new notification, 2F applies to individuals and Hindu undivided families not having business income, agricultural income or capital gains. The taxman has again targeted the vulnerable taxpayer earning salary income.

What Has Changed

The Saral Form 2E asked for your income details and the tax payable/paid thereon on a single page. Now, in addition to your income, prepare to disclose your entire family finances. Form 2F comprises two parts and nine schedules.

Just like in Form 2E, Part A of the new form requires the taxpayer to furnish general information like name, status, contact details, date of birth and PAN.

In addition to these details, you will now have to furnish details like whether it is your first return, the number of dependants, employer details mentioning whether you are a government employee or not, outgoings during the year and cash/bank balances as on the last day of the financial year.

Part B is where the change is more visible. It seeks information on your income under various heads and the tax payable/paid thereon. If you are used to attaching a separate sheet showing the computation of your total income and the tax along with your return form, then it won't be required anymore.

The nine schedules of the new form act as the computation sheet. These schedules ask for information and help you arrive at figures relating to income on house property, other sources, exempt income, deductions and tax paid. The figures arrived can accordingly then be plugged in Part A and B.

Schedule 5

If the new form sounds manageable till now, Schedule 5 will upset your calculations. The fifth schedule in Part B asks for your cash-flow statement. Here, you will be required to explain the details of your overall cash flows like the opening cash and bank balances on the first day of the financial year, income received, loans and gifts received.

On the expenses side, you will have to mention investments and expenses. Moreover, you will have to tally your opening and closing balances by adding the inflows and deducting the outflows. This is what the schedule looks like: 

No.

Particulars

Rs

1

Cash and bank balances as on April 1 (including those whose income is clubbed with yours)

 ---

2

Add: Income received from all sources (except exempt income)

 ---

3

Add: Other receipts, including exempt income, loans, gifts, investment redemption, etc.

 ---

4

Less: Details of investment outflows

 ---

5

Less: All other expenses including household expenses

 ---

6

Net: Cash/bank balance as on 31 March

 ---

The Rationale

By rolling out the new form, the government intends to mark and trail tax evasion by capturing the mismatch in income and expenditure of individuals.

For instance, if your salary is Rs 5 lakh (Rs 500,000) a year and your bank statement shows expenses only say to the tune of Rs 30,000, then there is a clear mismatch. This will be brought out in the new form.

Says Gaurav Mashruwala, certified financial planner: "The tax department was already investigating people making big investments, going on foreign trips or those are spending a lot on credit cards. The new form now makes the disclosure mandatory."

The second objective, according to the government, is to make the process of filing tax returns 'simple'. Sure the form does not require you to attach documents like your tax challans, tax deducted at source (TDS) certificates and computation statements, but the mere fact that you have to furnish cash-flow details will require commitment from you all through the year.

Clearly, filing income tax returns will no longer remain a year-end ordeal. Although the new form is more spread out and legible, it has not explained to the taxpayer how to calculate certain deductions like those under Section 80D, 80G and 80D among others. Thus, the new form does not completely eliminate the need of a tax advisor.

Secondly, taxpayers are being encouraged to follow a two-step procedure to file this return. First, the return and its schedules have to be transmitted electronically (without digital signature) to the web site http://incometaxindiaefiling.gov.in; and then a paper return has to be filed.

The date of such transmission and acknowledgement number given electronically by the income tax department for such transmission has to be filled in on the paper return. However, in case the return is not transmitted electronically, the paper return may be filed and will be treated as a valid return. This does not sound simple at all.

The Way Out

Apart from Form 2E, the tax advisors and chartered accountants (CA) use another Form 2D for filing returns. Form 2D is meant for people having income from business and profession and capital gains in addition to salaried income. However, this form is commonly used by CAs to file returns for individuals with salaried income.

Now, the new notification specifically mentions that Form 2F replaces only Form 2E, and thus, Form 2D still can be used to file returns after 31 July.

Says Gautam Nayak, a practicing CA: "The income tax rules say that Form 2D is still valid. This makes its use optional." Nitin Oza, another CA, agrees: "Unless the government issues a clarification preventing the use of 2D for salaried employees, the practice can be continued."

Understandably, the new form has kicked up a lot of dust with political heavyweights like Sonia Gandhi expressing their disapproval. Clearly, the last is yet to be said on the issue.

In the meantime, you can carry on using Form 2D, or venture into Form 2F from next year on.

What You Should Do

To ensure a smooth transition to Form 2F, just follow one rule: maintain records. Here is a list of things you can do to tackle 2F:

  • Maintain a file: Retain your documents like your salary Form 16, interest and dividend warrants and TDS certificates for further enquiries.
  • Minimise use of cash: Better stick to bank accounts, credit and debit cards for your transactions.
  • Track your bank statements: Be sure you know the details of the entries. Make sure where the credit is from and where the debit is going.
  • Maintain records of loans: All transactions like loans and gifts should be accounted for as should be investments made or redeemed.
  • Keep track of household expenses: If it is substantial, then list the details.
  • Other: You also need to maintain all these records for persons whose income is clubbed with yours.

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