Filing income tax returns (ITR) is a crucial financial responsibility for individuals and entities earning income in India. The financial year (FY) 2023-24, relevant to assessment year (AY) 2024-25, is no different. Filing an ITR not only fulfills a legal obligation but also brings numerous benefits and safeguards against potential penalties. This article deals into the significance of filing income tax returns for FY 2023-24 and outlines the compelling reasons to ensure timely compliance.
Legal Obligation and Compliance
One of the primary reasons to file an income tax return is to comply with the law. Under the Income Tax Act, 1961, individuals earning income above a certain threshold are required to file their returns. For FY 2023-24, individuals with gross total income exceeding the basic exemption limit must file an ITR. The exemption limits for different categories are as follows:
- For individuals below 60 years of age: ₹2,50,000
- For senior citizens (60-79 years): ₹3,00,000
- For super senior citizens (80 years and above): ₹5,00,000
Failure to file an ITR can result in penalties, interest, and legal consequences. By filing on time, taxpayers avoid these repercussions and demonstrate their commitment to adhering to the nation’s tax laws.
Avoiding Penalties and Prosecution
The Indian tax authorities impose penalties on taxpayers who fail to file their returns within the stipulated deadline. For instance, under Section 234F of the Income Tax Act, a late fee of up to ₹5,000 may be levied if the return is filed after the due date. For small taxpayers with an income of up to ₹5,00,000, the maximum penalty is ₹1,000.
In more severe cases, especially if tax evasion is detected, prosecution proceedings can be initiated, leading to further fines and imprisonment. Therefore, timely filing of ITR helps in avoiding these severe penalties and legal actions.
Claiming Refunds
Taxpayers who have paid excess tax through advance tax, self-assessment tax, or tax deducted at source (TDS) can claim refunds by filing their ITR. Without filing, any excess amount paid remains with the government. Filing a timely return ensures that any eligible refund is processed and credited to the taxpayer’s bank account, contributing to better cash flow management.
Carry Forward of Losses
Income tax laws permit the carry forward of certain losses to subsequent years, provided the return is filed on time. This includes losses under the heads of “Income from House Property,” “Capital Gains,” and “Business and Profession.” By filing the return within the due date, taxpayers can offset these losses against future income, thus reducing their tax liability in upcoming years.
Facilitating Loan and Credit Card Approvals
Financial institutions and banks often require proof of income and tax compliance when processing applications for loans and credit cards. The ITR serves as a vital document in this context, providing a comprehensive record of income and tax paid. It acts as a testament to the individual’s financial credibility and stability, making it easier to secure home loans, car loans, personal loans, and high-value credit cards.
Visa Processing and Foreign Travel
For individuals planning to travel or migrate abroad, many foreign consulates require proof of tax returns filed as part of the visa application process. The ITR helps establish the applicant’s financial position and assures the host country of their economic stability. It is particularly crucial for those seeking work or student visas, where financial credibility is a significant consideration.
Avoiding Scrutiny and Notices
The Income Tax Department employs data analytics and various other measures to scrutinize transactions and identify discrepancies in reported income. Non-filing or late filing of returns can trigger scrutiny and lead to notices from the tax authorities. Filing accurate and timely ITR helps in avoiding such scrutiny and ensures a smoother interaction with the tax department.
Contributing to National Development
Taxes are a primary source of revenue for the government, funding various public services and infrastructure projects. By filing an ITR, taxpayers contribute to the nation’s development, enabling the government to allocate resources for healthcare, education, defense, and other critical sectors. It fosters a sense of civic responsibility and participation in the nation’s progress.
Ensuring Financial Record Maintenance
Filing an ITR ensures that a systematic record of income, expenses, and investments is maintained. This can be beneficial for personal financial management, aiding in budgeting, financial planning, and investment decisions. It also helps in keeping track of financial growth and changes in income levels over the years.
New Tax Regime vs. Old Tax Regime
FY 2023-24 continues to offer taxpayers the choice between the new tax regime introduced in Budget 2020 and the old tax regime. The new tax regime offers lower tax rates but without exemptions and deductions, while the old regime provides various exemptions and deductions, resulting in higher effective tax rates. Taxpayers need to evaluate their financial situation and choose the regime that minimizes their tax liability. Filing an ITR allows taxpayers to make this choice and optimize their tax outgo.
Digitalization and Ease of Filing
The Income Tax Department has significantly improved the e-filing process, making it more user-friendly and efficient. The introduction of the new e-filing portal, pre-filled ITR forms, and online verification methods have simplified the filing process. Taxpayers can now file their returns from the comfort of their homes, reducing the time and effort involved.
Higher Income Exemptions and Tax Benefits
For FY 2023-24, taxpayers can benefit from several exemptions and deductions under the old tax regime, such as:
- Deduction under Section 80C: Up to ₹1,50,000 for investments in specified instruments.
- Deduction under Section 80D: For health insurance premiums paid.
- Deduction under Section 24(b): For interest on housing loans.
- Standard deduction for salaried individuals.
Filing an ITR ensures that taxpayers can claim these benefits and reduce their overall tax liability.
Self-Employed and Freelancers
Self-employed individuals and freelancers often have varying and irregular income streams. Filing an ITR helps them account for all sources of income and ensures compliance with tax laws. It also aids in availing business-related deductions and managing financial records systematically.
Startups and Small Businesses
For startups and small businesses, filing an ITR is crucial for several reasons, including:
- Availing tax holidays and incentives offered by the government.
- Facilitating future funding opportunities from investors.
- Building credibility and trust with stakeholders and financial institutions.
Partnership Firms and LLPs
Partnership firms and Limited Liability Partnerships (LLPs) are required to file ITR irrespective of their income level. This compliance is essential for maintaining proper financial records, availing tax benefits, and ensuring the smooth operation of the business.
Importance for NRIs
Non-Resident Indians (NRIs) earning income in India must also file an ITR if their income exceeds the basic exemption limit. Filing ensures that they can claim refunds on TDS deducted on their income and comply with Indian tax laws, thus avoiding any future complications.
Corporate and Large Businesses
For corporate entities and large businesses, filing an ITR is a critical compliance requirement. It involves detailed reporting of income, expenses, profits, and taxes paid. Compliance ensures smooth business operations, enhances corporate governance, and builds trust with shareholders and regulatory bodies.
Easing Future Compliance
Filing an ITR on time creates a robust record of compliance that can ease future tax-related processes. Whether it’s dealing with tax assessments, audits, or other regulatory requirements, a consistent history of timely filing demonstrates reliability and reduces the likelihood of complications.
Building a Credit History
A regular and timely filed ITR helps in building a strong credit history. This is essential for individuals and businesses seeking credit facilities, as lenders assess creditworthiness based on past financial behavior, including tax compliance.
Impact on Insurance Premiums
Insurance companies often consider the financial stability of an individual when determining premiums for life and health insurance policies. A regularly filed ITR acts as proof of income stability, potentially leading to better premium rates and terms.
Our view
Filing an income tax return for FY 2023-24 (AY 2024-25) is not just a legal formality but a significant financial practice with far-reaching benefits. From avoiding penalties and claiming refunds to building a strong financial record and contributing to national development, the importance of timely and accurate filing cannot be overstated. Ultimately, a proactive approach to filing ITR ensures compliance, financial well-being, and a stable economic future.
