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September 22, 2020

13 reasons Students should file their Income Tax Returns once they turn 18

by shivam jaiswal in Income Tax

13 reasons Students should file their Income Tax Returns once they turn 18

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.

Individuals or HUF who are less than 60 years of age and has gross total income more than Rs 2.5 lakh i.e. above basic exemption limit has to mandatorily file 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 lakhs

Are students who turned 18 required to file their ITR? Students who are earning taxable income are required to file an annual income tax return statement just like any other salaried individual, businessman or professional. Students who have income below the basic exemption limit or have no taxable income are not required to mandatorily file their ITR. However, it is always advisable and beneficial to do so.

Given below are benefits of filing ITR for students who have just turned 18:

1. No clubbing after 18 – Can receive tax free gifts from parents and invest

  • The income (for instance rent, interest on property, savings or term deposits, dividends on bonds purchased in his/her name, working as a child actor or other inherited earnings) of a minor is usually clubbed with that of a parent and tax deducted after combining the two sources of income as one single tax liability.
  • However, when the minor turns 18, then the provisions for clubbing would not apply in his/her case and he/she would be assessable independently. 
  • As clubbing provisions are not applicable and being chargeable to income tax independently, such minor who has turned major, can avail of the basic slab rate exemption which is available up to an income of Rs 250,000 for the later part of the financial year in which he turns major.
  • The benefit of all the investment-based deductions as provided under chapter VI A, primarily consisting of section 80C (Life Insurance, Fixed Deposits, ELSS / ULIP, etc investments), sec 80D (mediclaim), etc. shall also be available to such major, while computing the taxable income.
  • Thus, the individual can receive tax free gifts from parents and invest in their own name availing the benefit of investment-based deductions and taxing their income in their own name.

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2. Early filing can make your balance sheet strong

  • It is always advised to start filing your ITR at an earlier age, even when you do not have taxable income.
  • So, if you have just turned 18, you can aval the basic exemption limit of Rs 2,50,000.  If your net taxable income is less than or equal to Rs 5 lakh, you are eligible to claim rebate under Section 87A.  Basically, income up to Rs 5 lakhs will not be subject to income tax.
  • In 3 years, your balance sheet size will be approximately Rs 10 lakhs (if you consider Rs 2 lakhs in drawings)
  • This will boost your income and business/profession as you will mostly be saving your taxes, which will in turn strengthen your balance sheet.

3. Cultivates habit of savings and investments

  • Not a lot of students are aware of all the tax savings investment options available under income tax provisions.
  • The most popular tax-saving options available to individuals and HUFs in India are under Section 80C of the Income Tax Act. Section 80C includes various investments and expenses you can claim deductions on – up to the limit of Rs. 1.5 lakh in a financial year.
  • Apart from the 80C deductions, there are various deductions under Section 80 you can use to save on income tax. 
  • When one sits down to file their ITR they become aware of all the tax saving investment options.
  • This cultivates the habit of savings and investments among taxpayers. Saving money is important because it helps protect you in the event of a financial emergency.
  • Additionally, saving money can help you pay for large purchases, avoid debt, reduce your financial stress, leave a financial legacy, and provide you with a greater sense of financial freedom.
  • Investing ensures present and future long-term financial security. The money generated from your investments can provide financial security and income.

4. ITR Proof can be used for VISA processing

  • Many students from India prefer to study abroad. One of the biggest reasons for this shift in the share of Indian student overseas had been the pro-immigration policies of several countries.
  • Most embassies & consulates require you to furnish copies of your tax returns for the past couple of years at the time of the visa application.
  • Certain embassies are very particular about your tax compliance and hence, you are asked to furnish past ITR receipts.
  • This helps them assess your income and ensure that you are able to take care of the expenses on your trip.

5. Claiming Deductions

The income tax returns allow a taxpayer to claim deduction or exemption for investments, payments and expenditure incurred during the period. Students who have just turned 18 can claim the following deductions if they file their ITR’s:

  • Deductions for tax-saving investments under section 80C, 80CCC and 80CCD.
  • Deduction for payments such as medical insurance and expenses under section 80D, 80DD and 80DDB.
  • Interest on housing and other eligible loans under section 80E, 80EE, 80EEA and 80EEB.
  • Donations under section 80G, 80GG, 80GGA and 80GGC.

6. Easy 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, if you file your ITR from the time you turn 18 years of age, availing any loan in the future would become easier.

7. Buying a high insurance policy

  • With the increase in lifestyle-related diseases, it has become extremely important for everyone to have health cover irrespective of age or income.
  • It is always better to enter a health insurance policy as early as possible to get various advantages.
  • Insurance companies ask for ITR receipts if you opt to buy a term policy with sum insured of Rs 50 lakh or more.
  • This helps them to determine whether the insured will be able to pay their premiums at the pre-determined frequency.
  • If insurance companies have reasons (non-compliance) to believe that you are a tax-evader, they will not give you policies with more cover
  • So, if students want to buy an insurance policy once they start earning, it would be advisable that they start filing their ITR so it serves as an income proof for them.

8. Address Proof

  • ITR also serves as an address proof. A proof of residence is a document confirming where you live.
  • Address proofs are required almost everywhere we go from booking in a hotel, to opening a bank account, for buying a house, and so on.
  • So, filing ITR from the time you turn 18, will help you in providing the same as address proof where ever required.

9. Income Proof

  • ITR serves as income proof.
  • It will help your insurer to understand the compensation required to be paid in case of accidental death or disability.
  • Credit card sanctions, loan sanctions etc always require an income proof for the pre sanction or disbursement process.
  • Lenders consider ITR as the most authentic document supporting an individual’s income.
  • Salaried persons get Form 16 as their income proof but businessmen, consultants and partners of firms do not get Form 16.
  • Hence, ITR receipts become an even more important document for them, as for all sorts of financial transactions, ITR receipts will be the only proof of income and tax payment for the self-employed.
  • Freelancer or self-employed people do not have Form16. ITR is the document they have to show as income proof. Without this, they can face funding issues and transactional problems

10. Credit Card Processing:

  • Somekey factors that determine credit card eligibility are age, monthly income, credit score, employment status, ITR etc.
  • Banks can reject your credit card application if you haven’t filed your ITR.
  • Hence, if you file your ITR from the time you turn 18 years of age, your credit card application processing in the future would become simpler.

11. Set off and Carry forward of losses

  • The income (for instance rent, interest on property, savings or term deposits, dividends on bonds purchased in his/her name, working as a child actor or other inherited earnings) of a minor is usually clubbed with that of a parent and tax deducted after combining the two sources of income as one single tax liability.
  • However, when the minor turns 18 such income will be taxable in their own hands and will not be clubbed in the hands of the parent.
  • If such a person has had any losses, they will have to file their returns to set off and carry forward such 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

12. To claim Refunds

  • There could be a possibility that there has been tax deducted at source (TDS) on the name of a student 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, the student will have to file the ITR to claim refund of the same 

13. Avoid interest and penalty on tax liability

  • If you don’t file your ITR and are liable to file the same, 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.

It is always considered a prudent action to file one’s income tax return on time. More than any other benefit, being on the right side of law helps. It is recommended to keep the income tax department informed about one’s income and taxability. This communication is only possible when one files their ITR.

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