TABLE OF CONTENTS:
1.Introduction
2.What is an Income Tax Return
3. Is ITR Filing Mandatory in each and every case?
4. Benefits of Filing ITR even with Low Or Nil Income With Practical examples
5. Conclusion
INTRODUCTION
Many People believe that ITR Filing is compulsory only when they have taxable income (i.e. income more than basic exemption limit). Myth is that if their annual income is less than basic exemption limit i.e. Rs. Rs. 250,000 (Old Scheme) Or 4,00,000 (New Scheme), they do not require to file income tax return, but this is one of the biggest misconceptions among taxpayers because filing ITR have several financial and legal benefits even if your income is less than basic exemption limit or you have Nil income.
Firstly, if you file ITR even if your income is less than basic exemption limit, it indicates that you are a responsible citizen. Besides this, filing ITR have several financial benefits such as claiming tax refunds, maintaining proof of income, creating strong credit history, improving chances of getting loans and Visa, for carrying forward of Capital Loss and certain business Losses, Showing financial records in ITR, For calculation of deferred tax asset (DTA) and deferred tax liabilities (DTL).
What is an Income Tax Return (ITR)
Income Tax Return (ITR) is a form that a taxpayer (Individual, Firm, company, LLP, Others) file to the Income Tax Department to report income earned during financial year, to claim deductions and exemptions under income tax act, to calculate their total tax liability, to claim refund if they have paid extra advance tax or self-Assessment Tax or have been deducted TDS or TCS on purchases.
In short, we can say that ITR is a financial report card that individual and entities use to declare income and taxes paid to the income tax department during a financial year.
Is ITR filing Mandatory in each and every case?
No, But exact answer depends on several factors, such as whether you are an Individual, a company or a partnership firm or any other specified entity, as well as ITR filing compulsorily also depends on your total income/Turnover in case of individual, companies, firms etc. in a particular financial year.
If you are a company or a firm (including LLP), it is mandatory to file income tax return even if total income is zero or Nil. However, if you are an Individual having gross total income (i.e. total income without giving effect of SECTION 82, 83, 84, 85, 86 and deductions under chapter VIII) is less than basic exemption limit than it is not mandatory to file income tax return, but there are exemptions given under Income Tax Act, 2025 under section 263(1) and rule 163 in which filing ITR is mandatory even if income is less than basic exemption limit.
Section 263(1): If any person who is resident and is beneficial owner of asset located outside India or having any foreign source of income, ITR filing becomes necessary in all cases.
Rule 163: Conditions to be fulfilled for compulsory filing of ITR:
- Any person:
- Deposited an amount or aggregate of amounts more than Rs.1 crore in one or more current account.
- Has deposited in one or more saving bank account is greater than or equal to 50,00,000.
- Incurred foreign travel expenses more than INR 2,00,000/- for himself or any other person.
- Has incurred expenditure expenses of greater than INR 1,00,000/-towards electricity consumption.
- Has total sale, turnover, gross receipt in the business more than 60,00,000/- .
- Has total gross receipt of profession is greater than 10,00,000.
- Has aggregate TDS/TCS credit greater than or equal to 25,000 (50,000 in case of senior citizen )
Benefits of filing ITR with no income or NIL income with practical examples:
1. Act as proof of income: If an individual file income tax return even if there is low income or NIL income, it serves as a proof of income. Many banks, financial institutions and embassies consider ITR as a reliable document for calculating total income.
Example – A person has total income of 2,49,000 in a financial year which is below the taxable limit. Two years later, he wants to apply for personal loan from bank. In this case bank asks for last two years income tax return, since he had filed all his ITR’s on time, the loan processing become smoother.
- Makes loan approval easier: Income Tax Return is considered as a reliable financial document about individuals’ source of income. It serves as a valid proof of income. Banks generally prefer a person who file his ITR regularly. Whether you are applying for Home loan, Personal loan, Business loan, LAP (Loan Against Property), Education Loan, then a regularly filed ITR help to establish individual’s payment capacity.
Example – Two self-employed individuals earn almost the same income. One files ITR every year, while the other never files because his income is below than basic exemption limit. When both apply for home loan, the person who filed ITR consistently will get loan easier.
3. Essential for Visa Application by Embassies: Many countries ask applicants to submit ITRs while processing visa applications. It helps embassies to consider whether person applying for visa has genuine source of income or not.
4. Strong Credit History in Cibil: When an individual wants to apply for credit card, bank asks for income tax return as a proof of income to assess financial credibility. Regularly filing of Income Tax Return also helps to increase your credit score.
5. Helps carry forward certain Losses: If an individual incur losses from business, profession, capital losses, timely filing of income tax return allow you to carry forward those losses and set off those losses against future income/gains.
Example: A person earns a salary of Rs. 300,000 in a financial year which is less than basic exemption limit under new regime and he has invested some part of his salary in share market and mutual funds. He sold all these shares and has incurred a loss in this financial year. In next financial year his total salary increases and he starts falling over taxable slab limit. In this case, if he had filed ITR in the year in which he has incurred losses and had carried forward losses then he can set off that loss against next year’s taxable income.
6. For calculating Deferred Tax Asset (DTA) and Deferred Tax Liability (DTL): Deferred tax asset and liability is computed by comparing profit as per accounting records and income as per income tax act. ITR helps to determine DTA/DTL when;
* Depreciation claimed under income tax act.
*Brought forward business losses and unabsorbed depreciation is calculated.
* Deductions claimed under various sections.
*Calculated Taxable income after all adjustments.
These values are compared with accounting records to identify timing differences and determine Deferred tax asset and Deferred tax liability.
Example: – Depreciation in accounting records = 1,00,000
-Depreciation allowed in ITR = 1,50,000
-Suppose, Tax rate is 30% only
Since tax depreciation is higher in tax records the total income will be less in income tax return as compared to accounting records. This will create temporary timing difference of 50,000. The deferred tax liability of 15,000 (50,000*30%) will be recognized in balance sheet of the company. The deferred tax liability will be set off in future with deferred tax asset.
Conclusion:
In last we can say that filing income tax return is not just about paying taxes but it is also about building a strong financial Record. By filing ITR on timely basis even if there is low income or NIL income, you can claim various financial benefits. In simple words, filing your ITR on or before due date, means you are legally sound with prepared complete accounting records, Legally Tax compliant and ready for future opportunities.
Written by:- Miss Sakshi
(CA Finalist)
Reviewed by:- CA (CPA) (CS) Mandeep Singh
(B.Com, M.Com F&T, CA (India), CPA (Ireland, Europe), Company Secretary
