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November 18, 2020

10 Scenarios where you need to file ITR even when income is below 2.5 lakhs

10 Scenarios where you need to file ITR even when income is below 2.5 lakhs

An income tax return (ITR) is basically a document that is filed as per the provisions of the Income Tax Act, reporting one’s income, profits and losses and other deductions as well as details about tax refund or tax liability. The deadline for filing Income Tax Return for corporate and other assessees who are to get their accounts audited under Income Tax Act 1961 or under any other law for the time being in force is 30th September and for others, it is 31st July every year as have been prescribed under the Act.

However, with the ongoing COVID -19 pandemic a lot of income tax due dates were extended by The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 read with Notification No. 35 /2020, dated 24-06-2020. In view of the same, the due date of furnishing ITR for FY 2018-19 has been extended till 31st July, 2020 and for FY 2019-20 till 30th November, 2020.

The Income Tax Law provides for mandatory filing of returns in certain cases. Individuals or HUF who are less than 60 years of age and have gross total income more than Rs 2.5 lakh i.e. above basic exemption limit have to mandatorily file their income tax returns, according to the Income Tax Act.  For senior citizens, the basic exemption limit is Rs 3 lakh, and for those who are more than 80 years old, the basic exemption limit is Rs 5 lakh.

Individuals who have Gross taxable income exceeding the basic exemption limit:-

It is important to understand that the income tax law refers to “gross total income” which should exceed the basic exemption limit and not the taxable income, which is a requirement for mandatory filing of ITR.

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Let us refer to the below example of Mr X who is 40 years old and deriving income from house property only.

 ParticularAmount (Rs)
Rent Received (Considered to be the Net Annual Value of the property)7,00,000
(-) Standard Deduction u/s 24 @ 30%(2,10,000)
Income from House Property4,90,000
Gross Taxable Income4,90,000
Deductions under Chapter VI ANil
Net Taxable Income4,90,000
Tax on above (as per slabs)12,000
(-) Rebate u/s 87A(12,000)
Tax LiabilityNil

Mr X will have to file ITR even though his tax liability is Nil as his Gross Taxable income is exceeding the exemption limit of Rs 2,50,000.

However in the below mentioned situations one will have to mandatorily file an ITR even if the gross total income is less than the basic exemption limit.

Who is required to mandatorily file Income Tax Returns (ITR)?

1. Taxpayers claiming relief under section 90, 90A or 91

  • When you move out of India and start earning in another country or still have some financial interest in India, you would not only be taxed in the new country that you have moved to but might also be taxed in India.
  • There is a possibility that you have to pay taxes on your income in India and might be taxed again on the global income in the country that you shift to.
  • The double taxation relief would ensure that you do not end up paying taxes twice.
  • DTAA or double taxation avoidance agreement is an agreement between countries which ensures that taxpayers do not end up paying taxes twice on the same income.
  • Such relief from double taxation is available under Sections 90, 90A and 91 of the Income Tax Act. One can only claim such relief when they have filed their returns.

2. To claim Refunds

  • There could be a possibility that there has been tax deducted at source (TDS) on the name of an individual who makes an income or investment in India.
  • If TDS has been cut or If you have a refund due from the Income Tax Department, you will have to file the ITR to claim refund of the same 

3. Filing of Returns by Legal Heirs

  • When a person dies, apart from assets and liabilities, there are other things that get transferred to legal heirs.
  • These include the responsibility to file the last income tax return on behalf of the deceased and surrendering the person’s documents like permanent account number (PAN) and Aadhaar. 
  • As per section 159 of the Income Tax Act, 1961 in case a person dies, his/her legal representative shall pay the tax due, just as the deceased person would have, had he/she been alive.
  • Not filing returns could land the legal heir in trouble even if their individual income is below the basic exemption limit.

4. To Set off and Carry forward of losses

  • Set off of losses means adjusting the losses against the profit or income of that particular year. After making the appropriate and permissible set offs, there could still be unadjusted losses.
  • These unadjusted losses can be carried forward to future years for adjustments against income of these years.
  • However, unless you file your ITR, you cannot recompense your expenses/losses in the previous financial year to the current. If tax returns are not filed on time, unadjusted losses (with some exceptions) cannot be carried forward to future years. Hence, to ensure that the losses are carried forward for future adjustment, a tax return would be required to be filed

5. Claiming Deductions and Exemptions

  • Filing of a tax return is mandatory to avail all deductions in respect of investments (e.g. for employee contribution to Provident Fund under Section 80C) and to claim exemption of the eligible long-term capital gains (e.g. investment in a new residential house after the sale of another), which may eventually bring your taxable income to zero.
  • If total income before claiming deductions of these eligible investments and exemption of eligible capital gains is more than the above basic exemption thresholds, a tax return would be required to be filed.

6. Required for loans approvals

  • While applying for loans, the eligibility and quantum of loan would depend on one’s income.
  • The first thing any lender of a loan would check while the loan sanctioning and disbursement process is proper documentation
  • Majority of banks and NBFC’s ask for a copy of ITR’s for at least 3 consecutive years to sanction a loan. Lenders consider ITR as the most authentic document supporting an individual’s income.
  • Hence, you should regularly file income tax return if you are planning to avail any loan in the future.

7. Filing by NRI’s to claim refund

  • NRI’s have to mandatorily file his Income Tax Return if their total income is more than basic exemption limit.
  • Interest income earned on NRE account is exempt from tax if account holder is treated as a person resident outside India under Foreign Exchange Management Act (FEMA).
  • In some cases NRI total Income is less than Basic exemption Limit and they do not file their income tax return.
  • However TDS has been already deducted. Such NRI can file their tax return and Claim Refund from Income Tax Department.

8. Receipt of Gifts

  • The gifts that you receive either in terms of money or in other forms are exempted from tax if their total amount in a given financial year is less than Rs 50,000.
  • A gift above this value makes you liable for paying income tax only on the amount in excess of Rs 50,000.
  • If the value of the gifts received by you exceeds Rs 50,000 in a year, it will be taxable under the head “Income from other sources” and will be taxed according to the individual’s tax slab
  • If you have received a gift of more than Rs 50,000, you should show it in your income tax return. This will work as a historical record and help you produce evidence in case of any future enquiry.
  • If your income is above the basic exemption limit, it is mandatory for you to disclose your income from all sources including those from gifts, although you may not have to pay tax on it if it fulfils the exemption criteria.

9. If you have entered into any transaction listed under the Annual information Return (AIR)

  • If you have entered into any transaction listed under the Annual information Return (AIR) then you must file your IT Return as the income already has notice about you being involved in such transactions and may send you a notice asking about your income tax return.
  • An Annual Information Return is a format for filing an additional return with the Income Tax Department, apart from the regular return mentioned under Section 139.
  • The Annual Information Return (AIR) discloses high-value financial transactions carried out by assessees during the financial year.
  • The AIR is required to be furnished under section 285BA of the Income-tax Act, 1961 by the specified persons in respect of the specialized transactions mentioned in the Act.
  • A transaction registered or recorded by an assessee during the financial year will attract the need to file an AIR in case it falls under the specified criteria mentioned in the Act.

10. The government has introduced further conditions which provides for mandatory filing of returns by individual taxpayers

Individuals are required to file their returns mandatorily from 2019-20 onwards for the below mentioned cases (even when their gross total income is below the exemption limit)

  • aggregate amount deposited in current account(s) maintained with a banking company or a co-operative bank is Rs 1 crore or more
  • has spent Rs 2 lakh or more on foreign travel for himself or any other person
  • incurred electricity bills of Rs 1 lakh or more in a year
  • Claimed capital gains tax exemption on investment in house etc

These provisions were introduced to widen the tax base for the government and avoid any instances of tax evasion. Filing of ITR is extremely important even in cases where the tax liability is nil as they are a very important proof of income.

If you don’t file your ITR, the belated return could lead to extra interest on monthly basis for the remaining tax payable by you.You would then be required to pay interest at the rate of 1% for every month, or part of a month, on the amount of tax remaining unpaid as per section 234A. Also ITR cannot be filed if one hasn’t paid the taxes.The calculation of penalty will start from the date immediately after the due date.

As per the modified rules notified under section 234F of the Income Tax Act that is already in action from 1 April 2017, filing your ITR after the due date can make you liable to pay a maximum penalty of Rs 10,000. If the total income is not more than Rs 5 lakh then the maximum penalty for delay will only be Rs 1000.

Thus, filing ITR on time is beneficial in many ways while keeping you tax-compliant.

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