10 Benefits of Filing Income Tax Return (ITR)
10 Benefits of Filing Income Tax Return (ITR)
Tax payment becomes obligatory when income surpasses a certain threshold, facilitated by submitting an Income Tax Return (ITR). The ITR is a form detailing income from the previous financial year, from April 1st to March 31st. This requirement applies to all earning individuals, including salaried, in partnerships, or part of a Hindu Undivided Family (HUF). Fulfilling this obligation is not just a legal necessity but also a fundamental responsibility of every employed person in India. Moreover, there are several Benefits of Filing Income Tax Return (ITR), which will be further explored in the article.
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What is an Income Tax Return Filing?
The Income Tax Return (ITR) is a governmental form for individuals to report their financial details, including income, expenses, deductions, exemptions, and taxes paid. Those earning less than ₹2,50,000 annually are not obligated to file an ITR.
- For individuals with an income exceeding ₹2,50,000, filing an ITR is essential to avail of deductions under sections 80C, 80D, and similar provisions, which can significantly lower taxable income.
- While the process of filing ITR is often perceived as laborious, leading to avoidance by many, timely submission of these returns each year is a crucial aspect of responsible citizenship.
Latest Update on the Pay Later Option for Income Tax Filing
The Income Tax e-filing portal has recently rolled out a ‘Pay Later’ option, allowing you to complete your tax filing process before making any tax payments. You can pay taxes after you are done filing. For additional information, please refer to our guide – Pay later option for the Income tax return filing.
Different Forms of Income Tax Return
In India, there are several forms for filing Income Tax Returns (ITR), each designed for different types of taxpayers based on their income sources, the complexity of their financial situation, and other factors. Here’s a brief overview of the different ITR forms:
ITR-1 (SAHAJ):
- ITR -1 is for Indian residents with a total income of up to ₹50 lakh.
- Sources of income can include salary, one house property, other sources (like interest), and agricultural income up to ₹5,000.
ITR-2:
- For individuals and Hindu Undivided Families (HUFs) not having income from profits and gains of business or profession.
- Includes income from capital gains, multiple house properties, foreign assets/income, and income from other sources.
ITR-3:
- Individuals and HUFs have income from the profits and gains of businesses or professions.
- Suitable for those earning income as a partner in a firm but not for proprietors of a business.
ITR-4 (SUGAM):
- ITR -4 is for Individuals, HUFs, and Partnership firms (other than LLPs) have a total income of up to ₹50 lakh.
- Applicable for those with income from business and profession computed under sections 44AD, 44ADA, or 44AE of the Income Tax Act.
ITR-5:
- For firms, LLPs, Associations of Persons (AOPs), Body of Individuals (BOIs), Artificial Juridical Persons, estates of deceased, estates of insolvent, business trusts, and investment funds.
ITR-6:
- For companies other than those claiming exemption under section 11 (Income from property held for charitable or religious purposes).
ITR-7:
- For persons, including companies required to furnish returns under sections 139(4A), 139(4B), 139(4C), and 139(4D) (like trusts, political parties, institutions, colleges, etc.).
Who Should File Income Tax Return?
According to income tax laws in India, filing Income Tax Returns (ITR) is mandatory for certain individuals based on their gross total income (GTI) and other conditions. Here’s a breakdown of who must file ITR mandatorily:
Based on Age and Income Level:
- Individuals below 60 years with a GTI exceeding ₹2.5 Lakh.
- Individuals aged between 60 and 80 years with a GTI over ₹3 Lakh.
- Senior citizens above 80 years with a GTI above ₹5 Lakh.
Special Circumstances Requiring ITR Filing Regardless of GTI:
- If your electricity bills in a financial year exceed ₹1 Lakh.
- Depositing ₹1 crore or more in current accounts with banks or cooperative banks.
- Ordinarily resident individuals with income from foreign sources, foreign assets, or having signing authority in any foreign account.
- Spending over ₹2 Lakh on foreign travel for yourself or others.
- If your GTI surpasses the basic exemption limit before claiming deductions on capital gains under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA, or 54GB.
Even if your income falls below the basic exemption limit, falling under any of these conditions necessitates filing an ITR.
Benefits of Filing Income Tax Returns (ITR)
Filing Income Tax Returns (ITR) is not only a legal obligation for eligible taxpayers but also offers several key advantages that can enhance financial credibility and provide economic benefits.
1. ITR as Legal and Identity Proof
Filing an Income Tax Return (ITR) is a fiscal responsibility and an important legal document. Its value extends into two significant areas:
- Identity Proof: Your ITR can be utilized as a form of identity proof in various situations. Whether you’re applying for an Aadhaar card or any other official document, the government recognizes it as a valid identity and, in some cases, as proof of address.
- Income Proof: The ITR form includes a comprehensive record of your income and expenses, which forms the basis for calculating your tax liability. This aspect of the ITR makes it a credible document for proving your income. This is particularly useful in transactions that require income verification, such as property purchases.
For self-employed individuals who do not receive a Form 16, the ITR becomes an even more crucial document. It provides an official and reliable record of their earnings, which is necessary for various financial and legal processes.
2. ITR for claiming deductions
Here’s how filing your ITR can help you in claiming deductions:
- Investment-based Deductions: The government permits deductions on certain investments, which can significantly lower the tax you owe. Investing in specified instruments allows you to avail of these deductions and reduce your taxable income.
- Claiming TDS and Rebates: Tax Deducted at Source (TDS) and various tax rebates can be reclaimed through the filing of ITR. If excess tax has been deducted from your income, or if you’re eligible for any tax rebates, filing your ITR allows you to claim these amounts back.
However, it’s important to note that access to these tax-saving opportunities is contingent upon filing your ITR. Without filing, you forfeit the chance to claim these deductions and rebates.
3. ITR: A Crucial Document for Loan and Credit Card Applications
When you’re in the market for a loan, whether for buying a car, a home or for business purposes, financial institutions require a set of documents to process your application. Commonly requested documents include:
- Aadhar card
- PAN card
- Driver’s license
- Photo ID, among others.
A key document that banks and financial institutions often ask for is proof of your income. Typically, they request your Income Tax Returns (ITR) for the past three years. This will evaluate your financial history and current situation to determine your loan repayment capability.
Moreover, the importance of ITR extends beyond loan applications. Credit card companies also consider your financial background when applying for a credit card. They often review your past earnings and file tax returns before approving your credit card application.
4. Filing ITR: A Necessity for International Travel Plans
When planning to travel abroad, fulfilling certain procedural requirements is essential, and filing your Income Tax Returns (ITR) is crucial.
- Enhancing Visa Approval Chances: A consistent history of filing income tax returns can significantly bolster your visa application. It demonstrates financial responsibility and compliance with legal obligations, favourable factors in the visa approval process.
- Providing Financial Transparency to Embassies: Your ITR gives a detailed account of your financial situation, offering embassies a clear picture of your economic stability. This transparency is crucial as it helps the authorities assess your ability to finance your trip and ensure that you are not a financial risk during your stay in their country.
5. Avoid Penalties and Legal Consequences by Filing ITR
Under the Income Tax Act of 1961, you must pay taxes if your income exceeds the exemption limit. Failing to file your Income Tax Returns (ITR), despite being eligible to pay taxes, can result in significant repercussions:
- Monetary Penalty: The Income Tax Officer has the authority to impose a penalty of up to ₹5000 if you neglect to file your ITR. This penalty serves as a financial deterrent to ensure compliance with tax laws.
- Further Legal Consequences: Beyond monetary penalties, more serious legal actions can be taken against individuals who fail to file their returns. These can include further fines or other legal repercussions, depending on the severity and nature of the non-compliance.
To avoid these penalties and potential legal consequences, it is crucial to file your ITR if you meet the criteria for tax liability.
6. Carrying Forward Losses: A Benefit of Filing ITR
The Income-tax Act of 1961, particularly Sections 70 and 71, includes provisions allowing taxpayers to carry forward losses from one financial year to subsequent years. This feature is significant for offsetting losses against future incomes, thereby reducing tax liabilities in future years. Here’s how it works:
- Losses from House Property: If you incur a loss from house property, this loss can be carried forward for the next eight assessment years. During these years, it can be set off against income from house property, helping to reduce your taxable income.
- Loss from Business: Similarly, if you suffer a loss in your business, this loss can be carried forward and set off against future business income. This provision aids in balancing out income fluctuations over different years.
7. ITR Requirement for Purchasing Term Insurance
Insurance companies frequently ask for your Income Tax Return (ITR) records when applying for term insurance. This is because:
- Proof of Income: Your ITR acts as evidence of your annual earnings. Insurance providers use it to confirm your income level.
- Determining Coverage Amount: The coverage you can get from a term insurance policy often depends on your earnings. By reviewing your ITR, insurers can assess if you have a higher income and determine the coverage amount accordingly.
8. Protection against Black Money
In recent years, the government has taken several steps to combat black money and limit money outflows from India. With this goal in mind, the government made disclosing foreign assets owned by taxpayers in their annual income tax returns in the fiscal year 2011-12 compulsory. Additionally, even if you don’t own foreign assets and file your income tax return on time, your savings will never be considered black money by the IT department, as any income not reported to the department is considered black money.
9. For Startup Funding
Before funding your startup, financial institutions may demand to see your returns over the previous several years. These financial institutions and investors would want to study your business scalability, profitability, and other cost parameters from your business income tax return to ensure that the investment they are making is going in the right hands. It also verifies that a person is a tax-paying citizen of the country.
10. Obtaining Government Tenders
Contractors can have a strong track record of procuring large projects in their field of business, whether it’s a service or works contract, but if they don’t submit tax returns on time, or the returns aren’t filed at all, they may face serious consequences. It can be detrimental to their business.
For contractors, these returns must be filed on time, extremely accurately, and audited (if necessary). This is especially essential when you are trying to obtain a government tender. The tender scrutiny committee may occasionally inspect this work, and it is a common practice to check the ITR of the last five to seven years.
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