7 Reasons Why You Should File Your ITR

An Income Tax Return (ITR) is a form you submit to the Income Tax Department of India annually to file information regarding your income and taxes payable.

Broadly speaking, every person is mandatorily required to file ITR when the income crosses the basic exemption limit. It is optional for other persons. ITR can be used as a proof of income, which is a significant requirement for loan processing. 

Its also an important document for VISA application, and you can also carry forward losses and claim refund when you file Income Tax Return. This article explains in detail, meaning of ITR, who should file ITR, types of ITR and important benefits of filing ITR.

What is ITR?

• ITR stands for Income Tax Return.
• It is a formal statement provided by the taxpayer to the income tax department which contains all the income and deductions for the financial year.

Who Should File ITR?

• Every taxpayer whose income has crosses basic exemption limit is mandatorily required to file ITR.
• Basic exemption limit for the old regime is Rs. 2.5 lakhs and Rs. 3 lakhs for new regime respectively.
• Even if the taxpayers income does not cross the aforesaid limits, he is required to file ITR if he satisfies certain conditions. Some of the important conditions are mentioned below.
  • Electricity bill for the financial year has exceeded Rs. 1 lakhs
  • Foreign travel expense for the year has exceeded Rs. 2 lakhs
  • Deposits more than Rs 50 lakh in your 'savings' bank accounts.

Types of ITR

Depending on the legal status and level of income earned by the assessee, income tax return needs to be filed under their respective ITRs. The different types of ITR is given below:

• ITR-1 (Sahaj): For individuals and HUF having income within 50 lakhs, comprising of salary income, house property income, long term capital gains u/s 112A up to 1.25 lakhs, agricultural income not exceeding Rs. 5,000 and other income.
• ITR-2: For individuals and HUF who have income from salary, house property, capital gains and other income, owning unlisted shares or a director of a company
• ITR-3: For individuals and HUFs with income from business or profession, including those opting out of presumptive taxation. 
• ITR-4 (Sugam): Individuals, HUF, firms (other than LLP) who wants to file taxes under presumptive scheme
• ITR-5: For partnership firms, LLPs, AOPs, BOIs, and other entities not filing ITR-7.
• ITR-6: For companies other than those claiming exemption for income from property held for charitable or religious purposes.
• ITR-7: For persons including trusts, political parties, institutions.

The taxpayer must be cautious that he should follow the steps to file in order to ensure the return is valid, accurately reflects income details, and avoids penalties or notices from the Income Tax Department.  

Due Date and Late Filing Consequences

• For individuals and HUF not liable to tax audit, the due date of filing ITR is 31st July of the next financial year. 
• Non compliance of above due date may result in penalty ranging from Rs. 1,000 to Rs. 5,000 and also penal interest.

7 reasons to file your ITR on time

1. Helps with Loan Applications 

• Regular ITR filing can increase your loan eligibility. 
• The ITR is considered by banks and other financial institutions as evidence of income, financial stability and ability to repay the loan. 
• It is important to submit your ITR on time and correctly because any errors or non-filing can cause the rejection of loan applications. 
• Most lenders ask you to present ITRs for at least 2 years to process loan applications. 
• This rule applies to both self-employed and salaried individuals.

2. Acts as Income and Address proof

• ITR filings also serve as proof of income as well as addresses. 
• For self-employed individuals who lack formal income documentation, filing an ITR can serve as valid proof of stable income.
• Unlike salaried employees who receive regular wages and tax withholding certificates, self-employed taxpayers can use their ITR to demonstrate both income and address when needed.
• Also, several banks offer loans or credit facilities to self-employed individuals only if they can show IT returns, as it is a valuable income proof. 

3. Smooth Visa Application

• Applying for a Visa in most countries requires proof of your financial capability. Your filed ITRs can help prove your stability. 
• For countries with strict Visa guidelines, applying for the same without a filed ITR can lead to the dismissal of the application. 

For instance, if you plan to visit the USA, you must submit filed ITRs for the last three years as a part of the application process. Such a document can make the visa application process smoother and increase approval chances.

4. Avoiding Penalties and Late Interest

• Late filing or non-filing of ITR can result in penalties and interest. 
• The IT department can charge you with a penalty and fines based on the severity of your offence. 
• Additionally, interest will be added to the amount owed if you owe taxes and do not pay them by the deadline. 
• Legal repercussions, including prosecution, jail, and asset confiscation, may result from failure to file an ITR. To avoid such situations, you must submit your ITR on time.

5. Carry Forward Losses

• Regular ITR filing can enable taxpayers to carry over losses from one financial year to the following. 
• If losses are incurred in a financial year, it carried forward to the future financial years and can be reduced from the income of the future years.
• However, to carry losses forward, you must submit ITR within the deadline set by the Income Tax department. 
• For instance, if you incur a loss of Rs.2 lakh in a financial year, that amount may be carried over to the following year and deducted from future profits only when you file the ITR within due date.

6. Claiming Refunds

• The only way to get a refund of overpaid taxes is by filing an ITR. 
• If a taxpayer's tax burden in India is less than the taxes he/she has already paid, or if they have invested in tax-saving plans like the Public Provident Fund (PPF), the National Pension Scheme (NPS), or Equity-Linked Savings Schemes (ELSS), he/she may be eligible for a refund.
• Once the refund amount is calculated during the process of ITR filing, it will be processed and transferred to the linked bank account. 

7. Responsibility towards Nation

• Every year, the Indian government uses the Union Budget announcement as a forum to discuss and impose requirements for everyone to file income taxes. 
• Even if your income does not exceed the tax threshold, filing ITR demonstrates your responsibility as a citizen of the nation because your income and other personal data remain recorded. This annual activity is seen as a moral and social duty of every Indian citizen. 

Final Word

Overall, there are several reasons why filing ITR can benefit you regarding proper financial planning. Filing the return timely and accurately increases your chances of getting tax benefits and establishes credible financial standing among different financial institutions and credit rating agencies. The Income Tax Department now allows you to file for ITR through an online portal, making the process easy and comfortable.