Q. I am a 25-year-old data scientist working in Pune. I recently got married, my wife is a housewife, and she has never filed an income tax return. I wish to understand whether individuals not earning any salary are required to file an income tax return, she has never worked, I have purchased a few mutual funds in her name. Further, please explain what are the benefits of filing an income tax return. Please assume that she will be filing income tax returns under the old tax regime.
C. Prabhu, Panjagutta, Hyderabad, Telangana
An individual whose taxable income is below the threshold limit of ₹2.5 lakh is not required to compulsorily file an income tax return under the old tax regime, however, he/she is at liberty to file ‘nil return’. A nil return is an income tax return filed by an individual to declare that their annual income is below the taxable limit. Under Income Tax Act, 1961, if an individual’s annual income is less than ₹2.5 lakhs, he or she is not required to file a nil return.
However, it is highly recommended that a person file a nil return even if his income is below ₹2.5 lakh. We have elaborated on the various benefits of filing ‘nil return’ later in this article. By filing a nil return, the taxpayer would declare to the Income Tax Authorities that their income is below the minimum taxable threshold of ₹2.5 lakh.
All individuals whose taxable income is above ₹2.5 lakh are mandatorily required to file income tax return. However, under the following circumstances, even an individual whose income is below ₹2.5 lakh is required to file an income tax return mandatorily pursuant to Section 139 of the Income Tax Act:
- An individual paid an electricity bill of at least ₹1 lakh during the financial year
- An individual spent at least ₹2 Lakh on travel for oneself or another person abroad.
- An individual who deposited at least one crore rupees into one or more current accounts.
Benefits of filing nil return
There are various benefits of filing an income tax return even if your taxable income is below the minimum taxable income threshold.
Proof of income
Many authorities view an income tax return as a source of income documentation (both government and private). For instance, you can submit an ITR to claim certain institute and/or university scholarships. The ITR aids in establishing the prospective student's ability to prove their income.
A valid Indian passport and a valid visa are required for everyone who wishes to go abroad. In order to achieve this, it's crucial to demonstrate one's source of income, which is quite simple to do using an income tax return as a proof of income.
The income tax returns are often mandatorily required by the immigration authorities when granting visa approval for international travel together with other forms of financial and income proof. Some may contend that since they make less than ₹2.5 lakh annually, this perk (international travel visa) is useless to them.
But in case they choose to emigrate to a foreign country for higher studies or with their spouse then, not having a track record of income that has been demonstrated (no past income tax returns) will create unnecessary impediments to their visa application process and it may result in their visa application getting rejected from the concerned authorities.
When an individual applies for a loan, the lending institution will first request information about their PAN, credit bureau score, and their income tax return (if available). This is due to the fact that if an income tax return is provided and one has access to it, the lending institutions will be able to quickly assess the borrower's creditworthiness and authorise the appropriate loan amount and interest rate as a result. Typically, the banks or financial organisations asking for the loan require the last three years' worth of I-T returns.
Carry forward loss
An individual must file a return, even if it is a nil return if they intend to carry forward a stock market loss over to the following financial year. If you are investing in the stock market, you should be aware of the circumstances under which you can claim a set-off against loss incurred from stock market investment,
Tax refund claims
You can apply for a refund from the income tax department if your income withheld as tax deductible at source is greater than your tax liability. You must file an income tax return in order to receive this refund.
Irrespective of your income level filing an income tax return will benefit you in the long run. Most financial institutions require an individual’s spouse to stand as a guarantor for their loan or opt as a co-borrower. It is important that in such scenarios you have your past income tax return even if your past returns are nil returns.
Apart from lending, past income tax returns are useful in a number of other situations such as foreign travel, setting-off stock market loss, claiming tax refund etc. It is therefore highly advisable that one should file an income tax return annually even if his income is below the minimum taxable income threshold.
Kuvera is a free direct mutual fund investing platform.
Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.