PROSPERR.IO

A common misconception among taxpayers is that if you do not owe taxes, you do not need to file an ITR. This reasoning makes sense because you would have no taxable income and therefore no taxes owed and no requirement to file. However, under the stipulations of the 1961 Income Tax Act, this assumption is not always accurate.

The filing of an ITR in India is not based solely on the tax liability of individuals. As per the legislation, there are specific instances where the individual is required to file, even though the final tax owing is zero; such instances are determined by factors such as gross income before deductions, large financial transactions, owning assets outside of India, volume of turnover for a business, and TDS amounts.

As such, "zero taxes owed" does not automatically translate to requiring no filing.

It is important to know when you need to file your ITR to be able to avoid incurring penalties, receiving notices and having issues with compliance. Therefore, many people including employed individuals, self-employed individuals and retired individuals or stay-at-home spouses may find themselves falling under requirements to file when they do not have any taxable income after allowances or deductions.

This article sets forth the specific instances where it is required to file your ITR even when there is no tax liability owed and explains what is expected of you by Indian tax law in these situations

Is filing an income tax return (ITR) necessary for individuals with small budegt?

Many people mistakenly believe they have the option of filing an income tax return based on whether or not their taxable income is below the basic exemption limit. This is not necessarily correct in all circumstances.

The key to determining whether you are required to file a tax return under the Income Tax Act of 1961 lies in how "income" is defined under the Income Tax Act. . The law looks at your total income before claiming certain deductions and exemptions, not merely the final taxable income after tax-saving benefits are applied. This creates confusion. For instance, you may reduce your taxable income significantly by claiming:

• Deductions under Chapter VI-A (such as Section 80C or 80D)
• Capital gains exemptions under Section 54 series
• Certain exemptions under Section 10
  

After claiming these, your tax liability may become zero. However, if your gross total income before these claims exceeds the basic exemption limit, filing your ITR becomes mandatory.

Example in Action

Let us say you earn ₹6.2 lakh per year as your total gross pay; however, after you have claimed taxable expenses that were available to you totaling ₹2 lakh, your total taxable income is less than the exemption threshold and thus you do not owe any tax.

However, just because you do not owe any tax does not exempt you from filing a tax return because your gross income before expenses exceeded the reporting limit. Your requirement to file your tax return is based on the amount of taxable income before excluding or deducting any of the allowable expense, not on the final amount of tax payable Understanding this distinction helps prevent the common mistake of skipping filing simply because the final tax liability is nil.

High-Value Financial Transactions That Make ITR Filing Compulsory

The following are mandatory thresholds for filing an ITR during the financial year:

1. More than ₹1 crore deposited in one or more current accounts with the bank or co-operative bank

2. Total deposits exceeding ₹50 lakh in one or more savings bank accounts

3. Travel expenses exceeding ₹2 lakh incurred on overseas travel for yourself or for any other person

4. Expenditure for electricity consumption exceeding ₹1 lakh

These thresholds have been established under the various rules enacted by the Income Tax Act, 1961, in order to improve transparency in all types of financial activity.

Situations That Trigger Mandatory Filing

• You make total deposits into one or more current accounts with banks or co-operative banks of more than ₹1 crore during the year.
• You have made total deposits into one or more savings accounts of ₹50 lakh or more during the year.
• You have spent more than ₹2 lakh on foreign travel for yourself or anyone else during the year.
• Your total electric bill is more than ₹1 lakh during the year.
  

These limits are established by rules that are in accordance with the provisions of the Income Tax Act 1961 and are intended to provide transparency to taxpayers and to ensure that taxpayers can periodically provide the same information as their financial institutions provide.