13 benefits of filing Income Tax Returns in India
An income tax return 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 Income Tax Law provides for mandatory filing of returns in certain cases. Let us learn the same in detail.
Who is required to mandatorily file Income Tax Returns (ITR)?
- Individuals or HUF who is 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 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 lakh.
- Companies have to compulsorily file income tax returns irrespective of profit or loss.
- A firm, individual or a HUF whose books of account are required to be audited under section 44AB.
- A resident assessee having any assets (including financial interest in any entity) located outside India or signing authority in any account located outside India.
- Taxpayers claiming relief under section 90, 90A or 91.
- Assessee wanting to apply for refund.
- Assessee wanting to carry forward or set off their losses.
- Those who derive income from property held under a trust for charitable or religious purposes or a political party or a research association, news agency, educational or medical institution, trade union, a not for profit university or educational institution, a hospital, infrastructure debt fund, any authority, body or trust.
- If one has entered into any transaction under the Annual Information Return.
Given below are benefits of filing ITR:-
1. Claiming Deductions
- 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.
2. 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.
3. 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.
4. Claiming Relief under Sections 90, 90A and 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.
5. 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, you should regularly file income tax return if you are planning to avail any loan in the future.
6. 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.
7. 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.
8. VISA processing
- 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.
9. Buying a high insurance policy
- 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.
10. Filing Government Tender
- If you plan to start a business and need to fill a government tender, you will be required to show your tax returns of the previous years.
- This is to show proof of your financial status and whether you can support the payment obligation or not.
11. Avoid interest on tax liability
- 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.
12. Avoid Penalty
- 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.
13. 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.
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.