6 Benefits of Filing Income Tax Return

Written by : Knowledge Centre Team

2024-08-02

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Tax is levied on your income once it surpasses a certain level. To pay the taxes, you have to file an Income Tax Return.

ITR is a form wherein you enter details regarding the income you have earned in the past financial year (1st April-31st march). Filing an ITR is important and applies to everyone be it a salaried individual, Partnership, or even a HUF.

Filing income tax returns is often seen as a cumbersome process by the majority of the people. That is the reason why many decide to skip filing returns.

As a responsible citizen, you need to make sure that you file your returns every year. This is a moral duty of every working Indian.

Filing ITR can be useful to you as well. Here are the various ways in which filing an Income Tax Return can benefit you.

1. It Acts as a Legal Document

Income Tax Return holds immense legal value. It is recorded with the government. It acts as legal proof in two ways,

a. Identity Proof

The return that you fill can be used as identity proof in various scenarios such as while applying for an AADHAR card, or any other document. The government accepts it as a proof of address as well.

b. Income Proof

As discussed, the ITR form contains a detailed list of all your incomes and expenses. On this basis, the tax you have to file is calculated.

Thus, ITR can also be used as income proof as some transactions such as the purchase of property do require you to show proof of income.

This can come in handy for the ones who are self-employed and don't receive Form 16 .

2. Can help you Claim Deductions

To reduce the burden on the taxpayers and to encourage more people to pay their taxes, the government allows certain deductions to you.

a) These deductions and exemptions can be availed in some investments and thus help in reducing the tax you ultimately pay.

b) TDS and rebates can also be claimed back.

But to have access to these tax benefits, you are required to file an income tax return. If you have not filed ITR you cannot claim deductions as well.

3. Important Document While Applying for Loans

When you decide to apply for a loan to purchase something, say a car or a new home for your family or for business, the bank requires you to submit some documents such as

a) Aadhar card

b) PAN card

c) Driver's license

d) Photo ID etc

One important document asked is your income proof. Banks generally asked for ITR for the last three years. This is done to assess your past and current financial situation and whether you will be able to pay the loan or not.

Not only while applying for loans from the bank, but ITR can also be useful to get you a credit card as well. Credit card companies also ask for your past salary and returns before issuing you the card.

4. Helps if Planning to go Abroad

Going abroad involves some procedures to be followed. If you do not file your ITR, then it can deter your plans to go abroad. ITR form is one item in the list of the documents that are required by the countries that you want to visit.

This is because of the following:

a. Having a history of filing income tax returns helps your case and improves your chances of getting visa approval.

b. It gives details about your financial situation to the embassy.

5. Avoid Penalty and Punishment

The taxes that apply to you are governed by the Income Tax Act 1961. Thus, you are required to pay taxes if you fall above the exempt criteria.

So, if you are eligible to pay taxes on your income and yet still fail to file your Income Tax Returns, then you attract charges

The income tax officer can levy a penalty of up to Rs 5000 Rs. Other serious punishments can also occur if you do not file returns.

Thus, you should file ITR to be safe from such penalties and punishments.

6. Losses can be Carried Forward

Section 70 and 71 of The Income-tax Act 1961 contains some provisions for carrying forwarding losses of a particular year to the subsequent year. This means that you can move your loss to the next assessment year.

Here are a few examples:

a. Losses from house property can be carry-forward till the next 8 assessment years and can be set off from income from house property.

b. Loss from business can be carried forward and paid with the future income from the business.
If you do not file an Income tax return, you cannot carry forward or set off your losses.

Filing of the Income-tax return not only helps you but also helps the nation. The tax that you pay is used by the government to build infrastructure and to improve other facilities of the nation such as medical, defence, etc.

The more people file, the more can government spend and provide us with a good country.

FAQ

Income tax in India is based on incremental slab rates. The rate of tax is higher on higher income. You can also avail deductions from your taxable income if you invest in eligible instruments like PPF, NPS, ELSS, ULIPs, etc. Starting AY 2020-21 you have two tax regimes – old and new. The old tax regime has all the deductions from gross total income, while the new tax regime offers a lower rate of tax. So, if you are not investing in tax-saving instruments you can file your tax as per the new tax regime.

You can avail additional tax savings under the following sections other than section 80C:

a) Section 80D: Health insurance premium payments for family and parents up to Rs 75,000
b) Section 80CCD(1B): Self-contribution to NPS Tier-I account above 10% of salary or 20% of income if self-employed up to Rs 50,000
c) Section 80E: Education loan interest paid through the year
d) Section 80EE: Home loan interest paid up to Rs 50,000
e) Section 80G: Charitable contributions to non-profit organisations registered under section 12A up to 50% or 100% of the contribution
f) Section 24B: Interest paid on home loan

You have many tax-saving investment options. You can consider the following popular tax-saving schemes to save tax:

a) Term life insurance plan
b) Health and critical illness insurance plan
c) Life insurance plans such as endowment and moneyback plans
d) Pension plans from life insurance companies
e) Public Provident Fund (PPF)
f) National Pension System Tier-I account (NPS)
g) Employee Provident Fund (EPF)
h) Unit Linked Insurance Plans (ULIPs)
i) Equity Linked Savings Scheme (ELSS)
j) Senior Citizen Savings Scheme
k) Sukanya Samriddhi Yojana
l) 5-Year Tax Saving Fixed Deposits
m) National Savings Certificate (NSC)

Deduction of Rs 1.5 or 2 Lakhs under section 80C is available when you make investments or spend money under the heads mentioned in the Chapter VI A of the Income Tax Act, 1961. All tax-saving investments like PPF, NPS, ULIP, ELSS, etc. and all tax-saving expenses like children’s tuition fees, and registration expenses of a house property are part of Chapter VI A.

You will need to pay taxes on the incomes and gains from your investments. For example, your salary income is Rs 10 lakhs in a year, out of which Rs 7.5 lakhs becomes taxable after deducting exempt perquisites. Out of your income of Rs 10 lakhs, you invest Rs 3 lakhs in various options.

Even if none of your investments is eligible for tax saving under section 80C, your taxable income will remain Rs 7.5 lakhs. However, returns from some of these investments will become taxable in the next financial year when you receive them.

Since AY 2020-21 you have two ways to lower your income tax outflow on higher income – tax-saving investments and a new tax regime. You can stick to the old tax regime and invest your savings into eligible tax saving options. Tax-saving investments can give you a deduction of up to Rs 2 lakhs under sections 80C and 80CCD(1B), and additional deductions of up to Rs 2 lakhs under section 24.

Your deductions will be higher with other sections like 80E and 80G. But these are specific outflows which are not investments.

The best way to reduce your tax outflow legally is to use tax-saving investments and plan your future taxes carefully. Tax-saving investments will help you reduce your taxable income in the present financial year. If you invest in options which enjoy tax exemptions on maturity values, you can also reduce your future tax outflow. For example, Invest 4G ULIP from Canara HSBC Life Insurance allows you to stay invested up to the age of 99. This means that you can start investing at 30, build a corpus by 60 and have a tax-free lifetime pension.

Usually, a receipt is a convenient document to produce while claiming your deductions for expenses. However, the following alternatives are available if you lose the receipt:

a) Avail fuel or petrol expenses with number of kilometres
b) Credit card statement for computer items
c) Credit/debit card statement for stationery items
d) Membership documents to show running membership to claim the fees amount

You can claim HRA exemption with your employer and declare the amount in your ITR-1 form while filing your tax return. You will need to submit your house rent receipts with your employer to reduce your TDS. Use the online calculator to estimate your HRA exemption and claim the amount directly in your ITR.

If you are self-employed or do not receive HRA from your employer but have been paying rent for residence, you can claim a deduction of up to Rs 60,000 under section 80GG.

You can calculate your HRA exemption based on the following conditions. The amount of exempt HRA will be the lowest of the three:

a) HRA you have received
b) 50% of salary (basic + DA + Commission paid as % of turnover) if you are staying in a metro city otherwise 40%
c) Rent paid over 10% of your salary (as defined in step 2)

HRA Calculation: Everything You Need To Know

Minimum Alternate Tax (MAT): Meaning, Rates & Calculation

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