Why you should file ITR even if income is below taxable limit

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Income Tax Return (ITR) filing can be a gruelling task for most of us. This is because several factors like income heads, deductions, exemptions, due dates and consequences need to be adhered to in the process. However, it’s mandatory for those whose taxable income exceeds Rs 2,50,000. But even if your income is below the exemption limit, return filing can be compulsory in a few circumstances.

“The filing of Income-tax return (ITR) by an individual taxpayer is mandatory if his income before allowing capital gains exemption and deduction under Chapter VI-A exceeds the maximum exemption limit. Even if your income is below the exemption limit, the filing of return is mandatory if you have overseas assets, deposits worth more than Rs 1 crore in a bank account, foreign travel expense is above Rs 2 lakh or electricity consumption is more than Rs 1 lakh,” said Tarun Kumar, chartered accountant & direct tax leader – Coherent Advisors.

If the assessee does not fall in any of the above categories, he is not mandatorily required to file return of income. But one must know that ITR filing comes with numerous benefits that can be availed if you opt for voluntary filing. Some key benefits of voluntary filing of ITR are listed below:

Claim of tax refunds

If the tax paid by an assessee exceeds his actual liability, such excess amount is the ‘income-tax refund’ which assessee can claim by filing a return. If any income-tax refund is due to the assessee, it can be claimed by filing of ITR only. Thus, if an assessee fails to file the return, no refund can be claimed.

For example, an assessee earns interest of Rs 50,000 on his fixed deposit on which, the bank has deducted TDS of Rs 5,000. The assessee has no other income, therefore, he is not required to file his ITR since his income is below the maximum exemption limit. But the assessee will have to voluntarily file the ITR to claim the refund of TDS by the bank.

Interest on refunds

If refund of any amount becomes due to the assessee, he shall also be entitled to receive interest on such refund at the rate of 0.5% for every month or part of the month. However, the interest shall be payable only if amount of refund is not less than 10% of tax determined on summary assessment or regular assessment.

“If ITR has been furnished by the assessee on or before the due date and refund arises out of TDS, TCS or Advance Tax paid during the financial year then the interest shall be payable from April 1 of the Assessment Year to the date on which the refund is granted. If the ITR is not furnished by due date, the interest shall be payable from the date of furnishing return of income to the date on which refund is granted,” Kumar asserted.

Carry forward of losses

If an assessee has incurred losses during the year and such losses couldn’t be set-off against current year’s income then the losses remaining can be carried forward to next year.

The assessee, explains Kumar, “is entitled to carry forward the capital loss, business loss and loss from activity of owning and maintaining race horses provided the return of income is filed on or before the due date. If such return is not filed within the prescribed due date, the right of carry forward and set-off is lost.”

Consider an example: An assessee is engaged in share trading and he has incurred losses of Rs 5 lakh during the year, such loss can be carried forward to next year by filing the ITR within due date. If in the next year, the assessee has earned gains on the share trading, the carried forward loss of last year can be set-off against the gains of current year then the assessee will not be required to pay tax on such gains.

Normal deduction of tax at source

From 1 July, 2021, the non-filers of ITR are subject to higher TDS in case TDS in the previous two years was Rs 50,000 or more and the deductee has not filed the return of income for two assessment years relevant to the previous years immediately prior to the previous year in which tax is required to be deducted.

The tax shall be deducted at twice the applicable TDS rate or at the rate of 5%, whichever is higher. Therefore, you should file your ITR to avoid deduction of TDS at higher rates.

Avoid higher TDS on cash withdrawal

“The bank, co-operative bank or a post-office deduct tax at source from cash withdrawal from one or more accounts maintained by the recipient. The tax shall be deducted at the rate of 2% or 5% as the case may be. The rates and limits depend upon whether the person withdrawing cash has filed ITR or not in three preceding assessment years for which time limit to file ITR has expired,” Kumar pointed.

If an individual has not filed ITR, the TDS shall be deducted at 2% of the cash withdrawal exceeding Rs 20 lakh to 1 Crore and 5% of the cash withdrawal exceeding Rs. 1 crore.

If you file your return of income, the rate of TDS is 2% of the cash withdrawal exceeding Rs 1 crore.