When it comes to filing income tax in India, individuals believe that filing an Income Tax Return (ITR) is only necessary if their income exceeds the basic exemption limit. Based on the new income tax slab rates for FY 2025–2026 (AY 2026–2027), the tax for income up to ₹4 lakh is nil. Rationally speaking, one does not need to file a return if the income of the individual is below this figure. Although this sounds reasonable, it is a general misunderstanding that could result in financial loss.
Understanding the Income Tax Filing
The Income Tax Return Filing is used to report an individual’s total income derived during a financial year to the revenue department of income tax using its online portal. While there are different forms, the Central Board of Direct Taxes (CBDT) prescribes what to use based on income source and nature. For individuals ITR-1 (Sahaj) form is submitted for incomes up to ₹50 lakh from salaries, ITR-2 for foreign income or capital gains, ITR-3 for individuals who are partners in a firm, and ITR-4 (Sugam) for business or professional income. Types like ITR-5, ITR-6, and ITR-7 are meant for companies, and those claiming exemption under various sections.
Key Benefits of Filing ITR Even with Income Below the Tax Limit
Filing an ITR has its benefits even if your income is below the exemption level. It acts as a formal record of all your annual earnings. Here is a clear outline of the benefits:
- Claiming TDS/TCS Refund on Investments: If TDS is deducted on your income, but your total income is below the taxable limit, the only way to claim a refund of that TDS amount is by filing your income tax return.
- Serves as Proof of Income and Financial Credibility: For employees, freelancers, and small businessmen, ITR is the most critical official income proof document. It can serve as accepted proof in numerous financial and legal scenarios.
- Carrying Forward of Losses to Future Years: ITR filing allows you to carry forward losses, like capital losses, for future financial years. These losses may be offset against future income and help reduce tax liability in the years to come.
- Avoiding Penalties and Scrutiny: From the financial year 2017-18, you will be charged penalties between ₹5,000 and ₹10,000 for non-filing of ITR, and you may also receive notices from the tax department. Filing ITR saves you from such charges as well as legal issues.
- Helps with Hassle-Free Visa Applications: Visa officials might require copies of previous tax returns during the visa application process. Filing your ITR ensures that you are able to fulfil such requirements without hassles.
- Helps in Purchasing Insurance: Insurers usually ask for three years of ITR copies prior to sanctioning term loans or issuing insurance policies, like vehicle insurance. Filing ITR can make insurance approvals simple and to the point.
- ITR filing is required when availing of loans or financial products: Financial institutions ask for copies of past years’ tax returns when you apply for vehicle loans, housing loans, or other credit products. ITR serves as a document of proof of your income source, making loan availing easy.
- Helpful for Freelancers and Self-Employed People: In contrast to salaried individuals who receive salary slips, freelancers and the self-employed usually do not have official income proof documents. ITR offers formal income documentation that can be utilised for different reasons, like loans, visas, or insurance.
- Useful for Building Financial History: Most individuals invest in equities, property, or cryptocurrencies. If you suffer losses on such investments, it is necessary to file ITR so that such losses can be claimed and carried forward for a maximum period of eight years, which can be utilised to reduce gains in the future.
How ITR Filing Complements GST Compliance
For registered GST entities, ITRs become a crucial evidence of turnover and income, particularly at the time of audit or assessment. The Central Board of Indirect Taxes and Customs (CBIC) requires businesses with a yearly turnover of more than ₹2 crore to file GST returns monthly.
Synchronising ITR filing with the filing of GST returns guarantees consistency and accuracy in reported financial information, minimising the possibility of discrepancies that may result in penalties or legal consequences.
Additionally, the GSTN cross-verifies declared income under GST returns by using ITR data in order to ensure that businesses are not declaring lower income. Cross-referencing ensures that the tax system is maintained in its pure form and that fair competition is ensured among businesses.
Important Considerations
Below are some important points to keep in mind when you are filing an income tax return in India:
- Choosing Tax Regime: Taxpayers can opt for either the old or new tax regime based on their income and investment profile. Inform your employer if you want to opt for the old tax regime; otherwise, by default, you are covered under the new regime
- Form 16: Salaried persons need to obtain Form 16 from their employer, which lists the TDS deducted and paid on their behalf
- Cross-Referencing via Form 26AS: Cross-match the TDS information in Form 16 with Form 26AS, a consolidated report showing TDS/TCS deducted against various sources of income like salary, interest, etc
- Investment v/s Tax Saving: Investment in products like PPF, SSY, KVP, and NSC can be wealth-building even though they do not offer tax exemptions under your chosen tax regime
- HRA Exemption: If you qualify for House Rent Allowance (HRA) exemption, claiming for the old regime could prove to be beneficial. Otherwise, the new regime could prove to be beneficial
- Investments in Shares: Salary earners investing in shares must file their ITR in Form ITR-2
- Income from House Property: Salaried taxpayers earning income from one house property can file ITR-1. In the event of income from two or more house properties, ITR-2 must be filed.
Conclusion
Filing your Income Tax Return (ITR), even when your income is below the taxable threshold, offers numerous benefits. It serves as documented proof of income, which is often required when applying for loans, credit cards, or visas. It also allows you to claim tax refunds and carry forward certain losses to future years, which can help reduce tax liability later. Moreover, filing returns ensures compliance with tax laws and protects you from penalties or legal notices due to non-filing. It is a wise and proactive financial step that contributes to your financial credibility and builds a strong foundation for a secure financial future.