An income tax return (ITR) documents that taxpayers in India must file with the Income Tax Department to report their annual income, gains, and losses during a financial year. It is a legal obligation that every individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), and every other taxpayer must comply with if they meet the tax filing requirements.
Importance of filing Income Tax Return
Submitting an income tax return is an essential obligation for all taxpayers since it fulfills various purposes, such as:
Compliance with the law:
Filing an ITR is mandatory for individuals and businesses whose income exceeds a certain threshold. Failure to file an ITR can result in penalties and legal action. The Income Tax Department (ITD) uses ITRs to monitor tax compliance and identify taxpayers who need to comply with the law.
Claiming tax refunds:
Filing an ITR is necessary to claim tax refunds. If you have paid more taxes than you owe, you can claim a refund by filing an ITR. This is useful for taxpayers who have made investments eligible for tax deductions, such as under Section 80C of the Income Tax Act. For example, if you have invested Rs.1.5 lacs in a tax-saving mutual fund, you can claim a tax deduction for the same by filing an ITR.
Establishing creditworthiness:
Filing an ITR can also help establish your creditworthiness. Banks and other financial institutions often ask for your ITR to verify your income and creditworthiness when you request a loan or credit card.
Supporting visa applications:
ITR is required as a supporting document when applying for a visa. Embassies and consulates may ask for your ITR to verify your income and ensure you can support yourself during your visit. For instance, if you request a tourist visa to the United States, you may be required to present your ITR to demonstrate that you have the finances to support your journey and stay.
Carrying forward losses:
If you have incurred losses in a particular financial year, you can set them forward against future profits by filing an ITR. This can help reduce your tax liability in the future. For example, if you have incurred a loss of Rs. 1 lakh in your business in the financial year 2020-21, you can carry forward this loss and set it off against profits in the future. This will reduce your tax liability and help you save money.
Proof of income:
Filing an ITR serves as proof of your income. This is useful when you need to show your payment, such as when applying for a loan or renting a property. Your ITR can help you establish your income and credibility and increase your chances of getting a loan or a rental agreement.
Avoiding scrutiny:
Filing an ITR can help you avoid scrutiny by the ITD. The ITD selects a certain number of returns for scrutiny every year, and if your return is selected, you may have to provide additional information and supporting documents to verify the accuracy of your return. Filing an accurate and complete ITR can reduce the chances of your return being selected for scrutiny.
Avoiding penalties and interest:
Filing an ITR on time can help you avoid penalties and interest. Penalties and interest may only apply if your ITR is submitted on time. The penalty can be up to Rs.10,000/-, depending on the delay in filing the return. Additionally, interest is charged at 1% per month or part of the month on the unpaid tax amount.
Availing of tax benefits:
Filing an ITR can help you avail of tax benefits. If you have made investments eligible for tax deductions, such as under Section 80C of the Income Tax Act, you can claim a tax deduction by filing an ITR. This can help reduce your tax liability and save you money.
Increased credibility:
Filing an ITR can increase your credibility and financial standing. It shows that you are a responsible taxpayer compliant with the law. This can help you in situations where you need to establish your credibility and financial standing, such as when applying for a loan or when renting a property.
Examples of the importance of ITR filing
Here are some examples that illustrate the importance of ITR filing:
- Mr. A is a salaried individual who earns a monthly salary of Rs.50,000/-. He is eligible for a tax deduction of Rs.1.5 lacs as per Section 80C of the Income Tax Act. However, he needs to file his ITR for the financial year 2020-21. As a result, he cannot claim the tax deduction, and his tax liability is higher than it should be.
- Mrs. B is a business owner who earns a profit of Rs.10 lacs in the financial year 2020-21. She fails to file her ITR on time and is subject to an Rs.10,000/-penalty. Additionally, interest is charged on the unpaid tax amount, increasing her tax liability.
- Mr. C is a freelance professional who earns an income of Rs.6 lacs in the financial year 2020-21. He files his ITR on time and claims a tax deduction of Rs.50,000/- for his contributions to the National Pension System (NPS). As a result, his tax liability is reduced, and he saves money.
- Ms. D plans to apply for a student visa to study abroad. The embassy asks for her ITR to verify her income and ensure she can support herself during her stay. However, she has not filed her ITR for the past two years, making it challenging to obtain the visa.
Procedure to file an income tax return
Filing an income tax return can seem daunting, but it is a necessary part of being a responsible taxpayer. Here’s a step-by-step approach to submitting your income tax return:
- Determine your income source: Before filing your income tax return, determine your income source. This includes income from salary, business, profession, house property, and capital gains.
- Collect necessary documents: Gather all the required documents, such as Form 16, Form 26AS, salary slips, and interest statements from banks and other financial institutions.
- Register on the income tax e-filing website: Register on the Income Tax e-filing website by visiting www.incometaxindiaefiling.gov.in.
- Choose the appropriate ITR form: Choose the proper Income Tax Return (ITR) form based on your income source. Different ITR forms are available, such as ITR-1, ITR-2, ITR-3, and so on. Ensure that you select the correct form that applies to your income source.
- Fill in the details: Fill out the ITR form with personal information, income information, tax deductions, and other relevant information.
- Verify the information: Verify all the information you have entered in the ITR form to ensure it is correct. Check that you have entered all of the information correctly.
- Calculate tax payable or refund: Calculate the tax payable or refund due to you based on the information entered in the ITR form.
- Submit the ITR form: Once you have verified and calculated the tax payable or refund, submit the ITR form online. You can do this by clicking the ‘submit’ button on the Income Tax e-filing website.
- Verify the ITR form: After submitting the ITR form, you must verify it. This can be done electronically using Aadhaar-based OTP authentication or sending a signed physical copy of the ITR-V to the Income Tax Department’s Central Processing Centre.
- Keep a copy of the ITR form: Once you have filed and verified your income tax return, keep a copy for future reference.
In summary, filing an income tax return in India involves
- registering on the Income Tax e-filing website,
- choosing the appropriate ITR form,
- filling in the details,
- calculating tax payable or refund,
- submitting the ITR form,
- verifying it, and
- keeping a copy of it.
Filing an ITR is essential to managing one’s finances and fulfilling one’s civic duty. It is mandatory for individuals and businesses whose income exceeds a certain threshold, and failing to file an ITR can result in penalties and legal action. Filing an accurate and complete ITR can help you establish your income, avail of tax benefits, and increase your credibility and financial standing. Therefore, it is essential to file an ITR on time and ensure it is accurate and complete.