What is a Nil Return and When should you File One?

Written by : Knowledge Centre Team

2024-08-02

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According to Indian income tax laws, you are not liable to pay income tax if your annual income is below Rs.2.50 lakhs for citizens below 60 years of age. You do not have to file an income tax return (ITR) either. Is there any advantage of filing an ITR if your income is below Rs.2.5 lakhs? How does section 206AB of the Income Tax Act impact you if you do not file your ITR?

What is a Nil Return?

If your income is below the threshold of Rs.2.5 lakhs, your tax liability is zero and therefore you do not have to pay any income tax. Although you are not mandated to file an income tax return when you don’t fall in the tax bracket, you can do so. Such an Income Tax Return is termed “NIL Return”.

NIL Return is a way to communicate to the income tax department that you do not have any taxable income for that financial year. Although you don’t have to file such a return, there are a host of advantages of filing NIL returns.

Why Should you File a NIL Return?

Filing a NIL return is not just about crossing a task item in your list. Some of the benefits of filing ITR, more specifically, NIL returns are listed below:

1. Income tax returns may be asked for when applying for a visa.

2. Passport applications accept ITR/Assessment Order as a valid proof of address

3. Loan applications require ITR copies as supporting evidence to ascertain eligibility. You may presume, in July, that you don’t need a loan, but you can’t predict what will happen in November. It is better to keep documents handy instead of paying a penalty later.

4. Banks may deduct TDS on your interest on deposits. You will have to file an ITR to claim a refund.

5. If you have worked as a consultant or a freelancer for some organization, they may deduct TDS when disbursing your payment. Filing an ITR is the only way to claim a refund if you don’t fall in the tax bracket.

6. Section 206AB mandates TDS at rates higher than standard prescribed rates if you do not file your income tax return.

7. Your income in a given year could be below Rs.2.5 lakhs, unlike in any of the preceding years. Filing ITR will help keep track in chronological order.

8. If you own a foreign asset, filing ITR is mandatory even if your income is below the threshold of Rs.2.5 lakhs.

9. Carrying forward of losses incurred in the stock market is possible only when you regularly file ITRs.

How to File NIL Return Online?

The procedure to file a NIL return is not different from other ITRs. Follow the same procedure on the Income Tax Department site. Steps listed below for your ready reference:

I. Keep the following handy: PAN, Aadhar, salary info, bank account details, details of TDS, and form 16

II. Visit the income tax department’s ITR filing site/page

III. Enter your registered user ID (generally PAN or Aadhar numbers). On entering your user ID, you will be taken to the next screen.

IV. Enter your password

V. In case you do not remember your password, click on “forgot password”. On clicking “forgot password:

    a. You will be prompted to enter your user ID again
    b. Select an option to reset the password
         i. OTP on the mobile number registered with Aadhar
        ii. Upload Digital Signature Certificate (DSC)
        iii. Use e-filing OTP

c. After validation, you will be prompted to reset your password

VI. Select e-filing option

VII. Fill in your income data and investment amounts, if any

VIII. Any TDS deducted will be shown (you may validate in the 26AS form or Annual Information Statement)

IX. The income tax will be auto-computed and will show no due (ZERO)

X. Submit the return

XI. E-Verify or send a signed ITR-V form copy to CPC Bangalore

How to Reduce your Tax Liability to Zero?

In case your salary falls in the tax bracket, you can still plan your income structure and investments such that your net tax liability becomes zero. There are several provisions, in the income tax act, that help you save money and also save on taxes. Some key points that can help:

Improved Salary Structure:

If possible, discuss with your employer and design a tax-efficient salary structure

Include tax-free components in the salary
Avail House Rent Allowance (HRA). HRA can be 50% of the basic salary
Car maintenance of up to Rs 28,800 per annum
Up to Rs 5000 per annum towards birthday is also tax-free
Driver allowance
Newspaper allowance
Company provided car
Phone allowance

Invest in Tax-Saving Deposits:

Invest money in instruments that give you tax benefits (both at the time of investing as well as at maturity). The following investments and expenses offer full tax-free benefits:

Contribute to both Employee Provident Fund (EPF) and National Pension System (NPS)
Invest in Unit Linked Insurance Plans (ULIPs) that give both investment + insurance benefit
Contribute to Public Provident Fund (PPF) and Sukanya Samriddhi Yojana
Add children’s school or college tuition fees to your deductions list
Have a term life insurance and health insurance covers for the family
Purchase a house with a home loan

Do note that these tax-saving investments are long-term and you will need to contribute regularly to benefit from them. You cannot just decide to invest in them and forget. However, if you need a one-off investment for reducing your tax outflow in a financial year, you can consider other tax-saving options.

Other Tax-Saving Investments:

The following tax-saving options do not need regular contributions and may work better as a one-off investment:

5-Year Tax Saving Deposits
National Savings Certificate
Senior Citizen Savings Scheme
Equity Linked Savings Scheme (ELSS Mutual Funds)

Even if your income is below the taxable limit, it is best to file your ITR to avoid receiving a non-filing notification from the income tax department. A NIL ITR can come in handy on several occasions and may also help you get a refund for TDS deducted by the bank or any firm that you worked on gig projects.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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