Whether a return should be filed or not depends on your income level. When total income is within the minimum exemption limit, it’s not compulsory to file a tax return. The minimum exemption limit is Rs. 2.5 lakh if you are less than 60 years old. For those who between 60 and 80 years of age, income is exempt up to Rs. 3 lakh. And for those who are 80 years and above Rs.5 lakh is the exemption.
It may come as a surprise that return filing may be mandatory or beneficial in some circumstances where you do not have taxable income. Let’s understand them in detail.
You own foreign assets or foreign bank accounts: Return filing is mandatory if you are resident as per income tax act and own foreign assets. Or where you have financial interest in an entity located outside India or have a foreign bank account. This applies even though you have less than taxable income or no income at all. Non-reporting of foreign assets has attracted a lot of attention from the tax department. Penal provisions apply if your status is resident and you do not report them. You must file a return and report all your foreign holdings.
When you buy/sell shares: Sale purchase of equity shares result in capital gains. Many a times retired individuals or housewives trade in equity shares but do not report their gains or losses. Not that it is mandatory to do so when your total income is below exemption limit. But if you have short term capital losses, you can adjust them against capital gains. And in case losses are not fully adjusted they can be carried forward for 8 years and adjusted against capital gains in future. These losses can be carried forward by submitting your tax return for the year to which they belong.
When you are seeking a refund: The only way to claim a refund of taxes is by filing an income tax return. This applies to NRIs who have less than taxable income but are subject to TDS on rent payments. Or where, you could not submit Form 15G/Form 15H timely and TDS was deducted. Tax is already deposited by way of TDS, and the deductor cannot refund this TDS to you. It can only be claimed by filing a tax return. All returns seeking a refund must compulsorily be filed online.
Claim deductions via return: We know that the minimum exemption limit is Rs.2.5 lakh. But is this limit before or after allowing deductions? If you are claiming any deductions under section 80, those must be claimed through a tax return. So, Rs.2.5 lakh exemption is the gross income level. If your income before deductions is more than this limit, you should file a tax return and claim deductions in the return. This applies even if there is no tax payable.
Report exempt income: Sometimes, we earn a large income which is exempt from tax such as commuted pension or tax-free gratuity or long-term capital gains from shares and we do not file a tax return or do not report them.
The government tracks investments and expenses of PAN holders via AIR (Annual Information Report) submitted by banks and financial institutions. Explaining the source of a large investment or expense made via exempt income, may be easier when such income is reported in your tax return.
Planning to apply for a loan or a visa: The most trusted indicator of your earnings is your tax return. Visa authorities’ may ask for copies of your return. Lenders also request for tax return copies as proof of your income capacity. Sometimes, tax returns also have to be submitted for applying for a credit card. So even though, you may have less than taxable income you can benefit by filing your returns regularly.