Nil return: A must-do even for those with income below threshold level

Banks, passport and visa authorities ask for your ITR, and it's a prerequisite for tax refund

When it comes to filing a tax return, experts reiterate one mantra irrespective of the taxpayer’s income level: File your returns even though your taxable income is below the threshold for filing Income-Tax Return (ITR).

An ITR filed when an individual or an entity’s income falls below the taxable limit is referred to as a nil ITR. Says Ankit Rajgarhia, principal associate, Karanjawala & Company, Advocates, “By submitting this return, taxpayers demonstrate that they did not earn enough income during the financial year to be liable to pay income tax.”

Multiple benefits

While the Income-Tax (I-T) Act of 1961 does not make it mandatory for one to file a nil return, doing so has myriad benefits. Says Maneet Pal Singh, partner, I.P. Pasricha & Co.: “A nil return is accepted as a valid proof of address when applying for a passport or a visa.” This is particularly beneficial for young people choosing to emigrate, who may not have a taxable income.

Vikalp Bothara, partner, MAKV & Associates, also underscores the utility of prompt filing a nil return. “It helps to sidestep any potential penalties or legal hassles. It ensures a clean record with the tax department, while also serving as a legal proof of income.”

Despite an individual’s income being below the taxable limit, banks at times deduct Tax Deducted at Source (TDS) on interest from fixed deposits (when the interest income crosses the limit for TDS deduction). Says Singh, “A nil ITR must be filed to claim refund of TDS or any excess tax paid.”

Those encased in business activities, or having substantial investments, must file a nil ITR. If the assessee suffers losses, an ITR filing is mandatory to carry forward those losses.

Banks, too, ask for your ITR when you apply for a loan. Says Bothara, “ITR is useful when applying for loans, or when securing compensation for accidental death or disability. It is also instrumental in establishing trust with potential business associates. Even applications for government tenders might require tax return receipts of the preceding five years.”

In short, consistent filing of ITR, including nil returns, bolsters an individual’s financial credibility.

The I-T Act also makes the filing of nil return necessary for specific categories of taxpayers. Says Sandeep Bajaj, managing partner, PSL Advocates & Solicitors, “For designated types of business entities, submitting a nil return is obligatory under the I-T Act, even if there is no activity within a firm or its operations have not commenced.”

You can’t do without it

There is a widespread misconception that filing a nil return is not necessary if no tax is due. Says Rajgarhia: “If you meet the criteria for ITR filing, you must submit a return, even if it’s nil. Non-filing can result in penalties, increased scrutiny, and legal issues.”

How to proceed?

The procedure for filing a nil return is similar to filing a regular ITR. Says Naveen Wadhwa, deputy general manager, Taxmann, “A resident person without foreign assets can file in ITR-1. A non-resident or a resident with foreign assets can file in ITR-2.”

Additional conditionalities

Be aware of whether your financial situation requires you to file a nil return. Says Wadhwa, “Such a situation could arise when despite your income being below the basic exemption limit, you may be required to file a return because you meet certain conditions, such as foreign travel expenditure or electricity bill exceeding the defined threshold limit.”

Even when filing a nil return, double-check all information to prevent inaccuracies or inconsistencies that could result in penalties or processing delays. Says Bothara, “Report all income sources, even if they amount to zero. This practice can be advantageous for future financial endeavours by demonstrating statutory compliance.”

Maintain comprehensive financial records, even if your income is nil, as these may be required in future audits. Retain copies of your filing acknowledgement and verification form (ITR-V), Form 26AS, and other relevant documents.

Finally, adhere to the tax-filing deadline. “The deadline for an individual to file a nil return is July 31, 2023. A belated ITR can be filed until December 31 of the applicable assessment year,” says Singh.

Nil return: Who must file?

Individuals:

An individual with an annual income less than Rs. 2.5 lakh is not required to file a nil income-tax return (ITR)

Proprietorship firm:

Proprietorship firms, even those without commercial activity, are mandated to file a nil return if an ITR-3 or ITR-4 form was filed previously

Limited Liability Partnerships (LLPs):

All LLPs registered in India must file an ITR via Form ITR-5, irrespective of annual revenue, profit, or activity

LLPs not yet operational since incorporation must submit Forms 8 and 11 for the MCA annual return, and also file nil ITR

Source: PSL Advocates & Solicitors