Income Tax: Why do you need to file a nil Income Tax return

Sometimes, filing an income tax return might appear a bit complex. You aren’t required to file a return if your income is below the basic exemption limit, which varies based on your age and chosen tax regime.

The threshold for filing an Income Tax Return (ITR) under the old regime varies based on age groups. Here are the specific limits:

Individuals below 60 years: ₹2.5 lakh

Senior citizens (aged 60 to 80 years): ₹3 lakh

Super senior citizens (above 80 years): ₹5 lakh

In contrast to the old regime, the new tax regime sets a uniform filing threshold of ₹3 lakh for individuals, Hindu Undivided Families (HUFs), and other individuals (excluding companies and firms).

Nevertheless, filing an ITR becomes mandatory if your total income exceeds the basic exemption threshold. When income is below this limit, certain types of income such as capital gains or earnings from foreign assets might require filing an ITR.

The nature of income significantly influences the criteria for filing ITR, regardless of whether your total income is below the basic exemption limit. Below is an explanation of how capital gains and foreign assets can necessitate the filing of an ITR:

Capital gains

Even if your total income is below the limit, you may still need to file an ITR if you have capital gains during the year. Capital gains are taxed separately and can increase your taxable income beyond the exemption limit, necessitating the filing of an ITR. For those unfamiliar, capital gains tax applies to the profit earned from the sale of capital assets such as stocks, mutual funds, or real estate.

Capital gains undergo varying tax treatments based on the investment duration. Short-term capital gains (assets held for less than a year) are taxed at a flat rate determined by the asset class. On the other hand, long-term capital gains (assets held for more than a year) may qualify for exemptions or reduced tax rates. However, it remains essential to file an ITR to report them accurately.

Foreign assets

Foreign assets can compel the filing of an ITR even if there is no taxable income in India. Resident Indians have to declare their foreign assets in Schedule FA of their ITR forms.

This disclosure encompasses various categories of foreign holdings such as bank accounts, investments (stocks, mutual funds), and immovable property (real estate). This requirement for disclosure assists tax authorities in ensuring transparency and compliance. Failure to disclose foreign assets can lead to significant penalties, including substantial fines and potential imprisonment.

Filing an ITR is essential to claim tax refunds, such as excess tax deducted at source (TDS) on your income. Even if your total income is below the taxable limit, filing an ITR can be advantageous to claim:

Excess TDS refund: If the total TDS deducted during the financial year exceeds your actual tax liability, you can claim a tax refund. Filing an ITR is the sole method to request this refund.

Tax deductions and exemptions: Throughout the year, you may have incurred expenses that qualify for tax deductions. Filing an ITR enables you to avail of these deductions, potentially lowering your tax liability and facilitating a refund.

Essentially, filing an ITR ensures accurate tax payment and enables you to claim benefits such as refunds from excess TDS or tax deductions.

What is a Nil ITR and who should file it?

A Nil ITR refers to an income tax return filed when the taxpayer’s income does not exceed the taxable limit or when all income has been offset by deductions, resulting in no tax liability. It serves as an official document that informs the Income Tax Department about your financial status for that particular year, even if no tax was paid.

What are the benefits of filing a Nil ITR?

Many taxpayers question the usefulness of filing a Nil ITR, considering it a futile exercise. However, there are numerous benefits associated with filing it.

Claiming tax refunds: Even if you have no taxable income, TDS may have been deducted on certain earnings such as bank interest. Filing a Nil ITR enables you to request a refund for this excess TDS.

Support Visa applications: Proof of income is often required for visa applications in many countries. A Nil ITR can serve as valid documentation in these cases.

Carry forward capital losses: Filing a Nil ITR allows you to carry forward any capital losses incurred during the year. These losses can be offset against future capital gains, potentially reducing your tax liability in subsequent years.

Loan applications: Banks and financial institutions frequently require ITRs as proof of income during the processing of loan applications. A Nil ITR can satisfy this requirement.

Overall, although filing a Nil ITR is not obligatory for everyone, it provides valuable benefits and assists in maintaining a clear record with the tax authorities.

 

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