Income below exemption limit? File tax return, nonetheless, say experts

Offsetting losses against future income or receiving tax refund is only possible when you do so

Filing income-tax return (ITR) becomes mandatory only when a person’s taxable income exceeds the basic exemption limit of Rs 2.5 lakh in a financial year. However, for a variety of reasons, it is advisable to file a tax return, even when your taxable income is lower than this threshold.

According to Aditya Chopra, managing partner, Victoriam Legalis - Advocates & Solicitors, “Filing of ITR is a best practice one should adhere to, even if one does not have a positive income in a particular financial year.”

ITR as proof of income: Salaried employees receive Form 16 from their employers, which they can use as proof of income.

Says Gopal Bohra, partner, N.A. Shah Associates: “The self-employed don’t have Form 16. The ITR serves as an authentic proof of income for them.”

Over the past year, many people have lost their jobs, turned into freelancers, or become self-employed. Such individuals must file their ITR, even if their income does not exceed the basic exemption limit.

To claim losses: Those who have sustained a loss during a financial year will only be able to set it off if they file an ITR.

Says Chopra: “The loss claimed by filing of ITR in a particular financial year can be carried forward and adjusted against subsequent years’ positive income. This can reduce the assessee’s net tax liability considerably in those years.”

ITR must be filed before the due date to avail of this benefit.

To claim tax refund: If you are entitled to a refund from the income-tax (I-T) department, you will only receive it if you have filed your tax return.

Says Kapil Rana, founder and chairman, HostBooks: “Sometimes, a person has income which is not taxable, or is exempt from tax. Tax deducted at source (TDS) gets deducted from his income nonetheless. It is mandatory for such a person to file his tax return to receive his refund from the department.”

Consider the example of a person whose total gross income from various sources exceeds Rs 2.5 lakh. However, he makes tax-saving investments in such a manner that his net income falls below the minimum exemption limit. Such a person must, however, file his tax return if he wants TDS to be refunded. 

Rana adds that those investments must be in instruments that qualify for tax deduction under one provision of the I-T Act or the other.

For loan approval: If you wish to apply for a loan or a credit card, you must file your ITR.

Says Naveen Wadhwa, deputy general manager, Taxmann: “Banks and financial institutions require a copy of the ITR to check the applicant’s eligibility and ensure the safety of their principal. The ITR establishes the applicant’s financial status.”

Bohra adds that banks and financial institutions ask for ITR of the past three years to ascertain an applicant’s take-home salary.

If you possess foreign assets: A person who owns foreign assets must mandatorily file his ITR.

Says Rahul Agarwala, chartered accountant and business partner, AGSM Advisory: “An individual who is a resident of India must file his ITR if he has any asset or financial interest in an entity located outside India. He must do so even if his income is zero.”

Finally, most countries demand the ITR before they approve a person’s visa application. They use it to determine his financial position and credibility. So, filing a tax return becomes important even if you wish to go abroad.

When Tax Filing Becomes Mandatory

• If the taxpayer has paid electricity bill of Rs 1 lakh or more

• Spent Rs 2 lakh or more on foreign travel

• Deposited more than Rs 1 crore in bank current accounts

• If certain transactions of the taxpayer get reported under the annual information statement (AIS)

• Certain persons, authorities, regulators, and financial institutions are obliged to report transactions above a specified limit, as notified by the government, through the AIS

• These transactions include purchase of jewellery, bullion, shares, cash deposit, credit card payments, etc
 

Source: AGSM Advisory