Income Tax Return (ITR) is a form which a person is supposed to submit to the Income Tax Department of India. It contains information about the person’s income and the taxes to be paid on it during the year. Information filed in ITR should pertain to a particular financial year, i.e. starting on 1st April and ending on 31st March of the next year.
Income can be of various forms such as:
- Income from salary
- Profits and gains from business and profession
- Income from house property
- Income from capital gains
- Income from other sources such as dividend, interest on deposits, royalty income, winning on lottery, etc.
The Income Tax Department has prescribed 7 types of ITR forms – ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, ITR-6, ITR-7 and applicability of the form will depend on the nature and amount of income and the type of taxpayer.
Benefits of Filing Income Tax Return:
- Compliance with the Law:
Filing income tax returns is a legal requirement in many countries. By fulfilling this obligation, you avoid potential penalties and legal issues.
- Creditworthiness:
Having a record of filing tax returns can positively impact your creditworthiness. Lenders may use this information to assess your financial responsibility when considering you for loans or credit cards.
- Easy Loan Approval
Filing your ITR can be beneficial when applying for various loans such as vehicle loans (2-wheelers or 4-wheelers) or home loans. Major banks often require a copy of your tax returns as proof of your income statement. This is a mandatory document for loan approval.
- Income & Address Proof
Your Income Tax Return can serve as proof of your income and address.
- Quick Visa Processing
When applying for a visa, most embassies and consultants require copies of your tax returns from the past couple of years. These documents are among the mandatory requirements. Therefore, it is advisable to file your ITR in a timely manner.
- Carry Forward Your Losses
By filing your return within the original due date, you can carry forward losses to subsequent years. These losses can be offset against the income of future years, thereby reducing your tax liability. Without filing an income tax return, this benefit would not be possible.
- Avoid Penalty
If you are required to file your tax returns according to the income tax act but fail to do so, the tax officer has the right to impose a penalty of up to Rs. 5,000.
- For Buying Term Insurance
To approve term insurance plans, insurance providers often require applicants to submit their Income Tax Return (ITR) records as proof of their annual income. The coverage amount is determined based on the individual’s earnings, and presenting the ITR helps insurance providers assess a person’s higher income level.
- Claim Refund of Excess Tax Payments
Even if your income is below the taxable threshold, taxes may still be deducted from sources such as your salary, fixed deposit (FD), or other income. For example, if your total income is less than Rs. 2.5 lakhs, but you received Rs. 1 lakh from an FD, the bank is required to deduct 10% tax on this amount. In such cases, individuals can claim a refund for the tax deducted by filing an Income Tax Return (ITR). In simple terms, filing a tax return allows individuals to recover any tax deducted at the source.
- Claim Tax Refund
There may be instances where tax has been deducted (TDS) from your income, even if your total taxable income is below the basic exemption limit, or you have no tax liability for that year. In such cases, you must file an Income Tax Return to claim a refund of the TDS.
- Peace of Mind:
Filing taxes accurately and on time can provide peace of mind, knowing that you’ve fulfilled your financial responsibilities and minimized the risk of future tax-related issues.
Overall, filing income tax returns isn’t just about meeting legal requirements—it’s also about managing your finances effectively, accessing benefits, and ensuring your financial well-being in the long term.