Income Declaration Scheme: A Detailed Guide
Nimisha Panda- May 20
- 7 min read
Updated: May 24
To avoid paying income taxes, people sometimes underreport their income or fail to disclose it accurately. The income tax department carries out raids and scrutiny if someone's accounts are deemed suspect in order to get these individuals to record their incomes and pay taxes. To provide people who haven't properly disclosed their income a chance, the government also introduced the Income Declaration Scheme, 2016. The program enables a citizen to pay the necessary taxes and reveal any income that has been withheld. In this article, we will provide a detailed overview of the Income Declaration Scheme.
Table of Contents
What is Income Declaration?
The Indian government's unconventional yet incredibly effective income declaration program, formerly known as the Voluntary Disclosure of Income Scheme (VDIS), was designed to combat black money in the economy. The program was designed to target tax defaulters who, in order to evade paying taxes, failed to reveal their full income or all of their sources of income. A record number of people who reported their income were covered by the program. Over the years, a sizable sum of money has been recovered by the Finance Ministry from the program. The initial VDIS exceeded the government's expectations in terms of success. Sequestered assets alone were valued at Rs. 260 billion. The Finance Ministry's assurance that no financial offense laws would apply to the tax dodging individuals or firms participating aided the plot.
What is Income Declaration Scheme?
The government introduced the most recent income declaration program in the 2016 Union Budget. This plan was designed to find the black money and reintegrate it into the nation's financial system. The program gave wealth tax and income tax defaulters the chance to reveal their income and fall under the purview of the Income Tax Act, much like VDIS. These people can report their undisclosed income under this system by paying a 30% tax, a 7.5% surcharge, and a 7.5% penalty, for a total effective tax rate of almost 45%. The Income Declaration Scheme assured taxpayers that they would not be investigated and that they would not be prosecuted under the Wealth Tax Act of 1956 or the IT Act. Mahesh Shah of Ahmadabad, Gujarat, made a single disclosure of Rs. 138.6 billion, one of the scheme's noteworthy announcements.
Illustration: Assume that A received a commission of Rs. 3 lakh for helping B buy residential land. However, since the money was paid in cash and there is no documentation proving receipt, A has not reported this income. This occurrence occurred in 2016. After learning about The Income Declaration Scheme, 2016, A discloses this income so that they can lawfully use the funds to launch a business. A submits an online declaration on the Income Tax India website after agreeing to disclose this income.
Benefits of the Income Declaration Scheme
Individuals shall be immune from any inspection or investigation under the Income Tax Act if they properly declare any unreported income under the income declaration program and pay the applicable tax and penalty. Subject to specific requirements, the declarant will also be immune from prosecution and the Benami Transaction Act of 1988. Making a legitimate declaration has the following advantages:
According to the Income Tax Act, the stated undisclosed income will not be counted toward the total income for any assessment year.
Information in the declaration will not be used against the declarant in actions for penalties or prosecution under the Wealth Tax Act of 1957 or the Income Tax Act.
As long as the benamidar transfers the assets to the declarant or their legal agent by September 30, 2017, the revealed assets will be exempt from the Benami Transactions (Prohibition) Act, 1988.
No wealth tax will be applied to the disclosed asset's value during any assessment year.
The finality of completed evaluations will not be impacted by the declaration of unreported income. Under the Income Tax Act or the Wealth Tax Act of 1957, declarants are not permitted to reopen any assessments or reassessments, nor are they permitted to seek any relief or set-off in any appeal or other procedures pertaining to such assessments.
Who Can Declare Income and Assets under the Income Declaration Scheme
Any person who has previously paid their taxes in full and has not disclosed their income, either in full or in part, may come forward and disclose their concealed income or assets. Under the income declaration plan, all domestic taxpayers are eligible to declare their income, including
Individual
HUF
Firm (LLP/ Partnership Firm)
Company (Private Limited/ Public Limited/ One Person Company)
An Association of Persons or a Body of Individuals (incorporated or not incorporated)
Artificial judicial person and a local authority
Declarations under the Income Declaration Scheme
When allowing individuals or businesses to drop lawsuits, the income declaration scheme takes a number of criteria into account. Among the contributing factors are:
This scheme covers all forms of undisclosed income, whether they come from investments, assets, or other sources. This includes the revenue from prior years or the 2015–16 fiscal year.
This scheme can be used for additional disclosures by any individual or business that did not report their income in the prior year's ITR. However, disclosure under this system may not be available to those who have already received notices under sections 142(1), 143(2), 148, 153(A), or 153(C). Furthermore, disclosure under this scheme is not permitted for those who are the subject of a government survey or investigation, those involved in cases under the Black Money Act of 2015, those notified under the Special Court Act of 1992, and those with cases under the Indian Penal Code (IPC), Unlawful Activities (Prevention) Act of 1967, Narcotic Drugs and Psychotropic Substances Act of 1985, and Prevention of Corruption Act of 1988.
Foreign assets or income do not come under this scheme.
For undisclosed assets, the fair market value will be determined using the asset's market value as of June 1, 2016, and declarants cannot claim any deductions or allowances for their disclosure.
There will be a 30% income tax on disclosed assets and income, as well as additional penalties and cess, such as the Krishi Kalyan Cess and a penalty of 7.5% each, applied to the total amount of disclosure, for a total penalty of 45% on the declaration.
According to the IDS, people or businesses that declare their assets and income under the Wealth Tax Act or the Income Tax Act would not be investigated or scrutinized. The assets listed in the report are not subject to wealth tax. According to the IT Act, the amount of disclosure will also not be counted toward the declarant's total income for the assessment year.
The Direct Tax Dispute Resolution Scheme, a similar program, was introduced on June 1st, 2016. People who have pending applications before the nation's Income Tax Commissioner can use this plan to file their tax obligations. The Central Board of Direct Taxes (CBDT) is in charge of running the program.
The following table represents the signing authorities in case of different categories of declarants declaring their income under the Income Declaration Scheme:
Category of Declarant | Signing Authority |
Individual | · Self if the declarant is present in India · Self or Authorised Representative if the declarant is absent from India · Guardian or another Competent Person on the declarant’s behalf if the declarant is mentally incapacitated – By |
Hindu Undivided Family (HUF) | · Karta of HUF · Any other adult member of HUF if karta is absent from India or mentally incapacitated |
Firm | · Managing partner of the firm · Other managing partner if the managing partner is absent from India or mentally incapacitated |
Company | · Managing Director (MD) of the company · If the MD cannot authorise the declaration, the other MD can sign |
Income Declaration Scheme Penalty Rates
The following is the list of penalty rates applicable under the Income Declaration Scheme:
Income tax @30% of undisclosed income.
Surcharge @7.5% of undisclosed income.
Penalty @7.5% of undisclosed income.
Overall, the taxpayer has to pay 45% of the undisclosed income to the government under the scheme.
Forms to Be Filled for the Income Declaration Scheme
Form 1: This is a declaration form that the taxpayer must complete and submit by the deadline, which is September 30, 2016.
Form 2: Declaration acknowledgement must be sent out within 15 days of the end of the month in which the declaration is completed.
Form 3: By the deadline of November 30, 2016, the declarant must submit Form 3: Imitation of Payment of Tax, Surcharge, and Penalty.
Form 4: PCIT/CIT must submit the certificate of declaration on Form 4 within 15 days of the payment notification date.
How to Declare Income Under the Income Declaration Scheme
Taxpayers must complete Form 1 under the income declaration system, as outlined in the Income Declaration Law, 2016. Form 1 can be submitted in the ways listed below:
Use a Digital Signature online
Send information electronically while using the Electronic Verification Code (EVC)
In paper form to the primary commissioner in question.
Immunity for the Declarant Under the Income Declaration Scheme
No investigation or inspection of such declarations under the Income Tax/Wealth Tax Act.
No charges under the Wealth Tax/Income Tax Act.
The 1988 Benami Transactions (Prohibition) Act grants immunity.
Conclusion
We will have to wait and see how many disclosures are made and how much money the government receives from the plan, even though financial experts say it is "quite encouraging." This amnesty programme, which is similar to the Voluntary Disclosure of Income Scheme (VDIS) of 1997 and brought in over crores for the government, gives defaulters an opportunity to come clean. But the Income Declaration Scheme of 2016 only provides a "discount" on the tax penalty, whereas VDIS protected people and businesses who revealed their actual income against legal penalties.
FAQ
Q1. Which form should I file to declare income under IDS, 2016?
To report their income under the 2016 income declaration scheme, individuals must file ITR 1.
Q2. What is the Income Declaration Scheme?
As part of the Union budget, the Narendra Modi-led Indian government unveiled the Income Declaration Scheme 2016 in an effort to identify and reintegrate black money into the economy. This plan allows taxpayers to report and pay taxes on their unreported income.
Q3. Am I required to declare foreign income in India?
The 2015 Black Money Act imposes a penalty of up to Rs. 10 lakh for failing to report foreign assets or income in your Income Tax Return (ITR)! Your ITR for FY 2023-24 (AY 2024-25) must be filed or revised by December 31, 2024.
Q4. What income has to be declared?
The majority of income from employment, trade profits, real estate rental income, and pension income are all considered taxable income.
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