India is home to a population of more than 145 crore people. Of this nearly 90 crore individuals are above the age of 18 years and around 76 crore people hold a Permanent Account Number (PAN). Despite this the number of income tax returns filed each year is only about 9 crore. Out of these nearly 6 crore returns are nil tax returns. Effectively only around 3 crore individuals actually pay income tax in India.
This naturally raises an important question — why is the number of taxpayers so low?
The answer lies in a combination of structural and practical factors. India continues to be a largely agrarian economy where agricultural income is exempt from income tax. A significant portion of the population is below 18 years of age and is engaged in school and college education. Further a large section of the population earns income up to ₹4,00,000 per annum, which is below the basic exemption limit prescribed under the Income Tax Act.
In addition a sizeable part of the Indian economy still operates on a cash basis and there remains a lack of awareness regarding statutory compliance requirements. In recent years the Income Tax Department has increasingly focused on improving transparency in cash-based transactions and enhancing taxpayer awareness. These sustained efforts have resulted in a steady expansion of the tax base and consequently the number of income tax returns filed has almost doubled over the last seven to eight years. However there is still a long way to go.
Who Is Required to File an Income Tax Return?
1. Persons Having Total Income Exceeding ₹4,00,000
There is widespread publicity that income tax is effectively exempt up to ₹12,00,000 on account of the rebate available under Section 87A of the Income-tax Act, 1961. While this provision eliminates the tax payable, it does not exempt a person from the obligation to file an income tax return where the total income exceeds the basic exemption limit.
For instance if a person has a salary income of ₹6,00,000 and does not file the return within the due date under the mistaken belief that no tax is payable a late filing fee of ₹5,000 may become leviable under Section 234F, even though the final tax liability is nil.
As per Section 139(1) every person whose total income exceeds the maximum amount not chargeable to tax is mandatorily required to furnish a return of income within the due date. In simple terms exemption from payment of tax is different from exemption from filing of return. Once the income exceeds the prescribed threshold (Presently ₹4,00,000) filing the return within the due date becomes a statutory requirement.
2. Where Tax Is Deducted or Collected at Source
The Income-tax Act provides for deduction or collection of tax at source on various types of income such as interest, commission, professional fees, contract receipts, purchase of car etc. Where any such income is received and tax has been deducted or collected therefrom, filing of an income-tax return becomes necessary in order to claim credit or refund of such tax, even if the total income is below the basic exemption limit of ₹4,00,000. Refund of tax deducted or collected at source can be claimed only by furnishing a return of income.
Accordingly even where the total income does not exceed ₹12,00,000 and no tax is ultimately payable due to the rebate available under Section 87A, filing of the return is required if credit or refund of TDS or TCS is to be claimed.
3. Agriculturists Having Income from Other Sources
Agricultural income is exempt from tax but agriculturists are not fully exempt from filing income-tax returns.
Where a person in addition to agricultural income earns other income such as income from house property, capital gains, interest from fixed deposits or any other taxable income and the total income excluding agricultural income exceeds ₹4,00,000, filing of an income-tax return becomes mandatory under Section 139(1) of the Income-tax Act, 1961.
4. Persons Entering into Specified High-Value Financial Transactions
The Income-tax Department tracks various specified high-value financial transactions through banks, registrars, financial institutions and other reporting entities under the reporting framework prescribed under the Income-tax Act. Such transactions include:
• Cash deposits in savings or current accounts beyond prescribed limits.
• Investment in fixed deposits.
• High credit card expenditure.
• Purchase of immovable property.
• Foreign travel.
• Investment in shares mutual funds or other securities.
Where such transactions are undertaken and the total income exceeds ₹4,00,000, filing of an income-tax return may be required even if no tax is ultimately payable due to exemptions or rebates. Failure to file the return in such cases may result in notices or enquiries from the Income-tax Department.
How to Stay on the Safer Side
There is no cause for concern. The Income-tax Act follows a self-assessment system under which every taxpayer is expected to correctly assess and report his or her income. Based on recent data, only a very small percentage of total income tax returns (ITR) filed in India are selected for scrutiny, with estimates generally falling between 0.25% and 1%. The Income Tax Department operates on a “Trust First and Scrutinise Later” philosophy, accepting over 99% of returns without detailed investigation.
Every individual should annually compute his total income from all sources. Income refers to gross receipts reduced by expenses incurred wholly and exclusively for earning that income. Personal expenses such as household expenses medical expenses or personal rent are not allowable deductions unless specifically permitted under the Act.
Where the total income exceeds ₹4,00,000, filing of an income-tax return becomes advisable and in many cases mandatory under the provisions of the Act. If the total income is below ₹4,00,000 and none of the other prescribed conditions apply filing of a return is generally not required.
Registration on the Income-tax E-Filing Portal
Registration of PAN on the Income-tax e-Filing Portal does not by itself mandate filing of an income-tax return. However, registration enables the taxpayer to access financial information reported against the PAN by banks, registrars, financial institutions and other reporting entities and to receive electronic alerts relating to notices communications or compliances issued by the Income-tax Department. Information relating to specified high-value transactions requiring attention is also generally communicated through email or SMS.
Verification of AIS and Taxpayer Information Summary
The Annual Information Statement (AIS) and Taxpayer Information Summary are valuable tools provided by the Income-tax Department. Financial information reported by banks, registrars, financial institutions and other reporting entities is consolidated in these statements against the PAN of the taxpayer.
Taxpayers can verify the correctness of the information and report any discrepancies online through the e-Filing portal. Where the income reflected in the AIS indicates that the total income exceeds ₹4,00,000, filing of an income-tax return becomes practically necessary to explain the transactions and ensure proper compliance.
Online Filing Facility
The Income-tax e-Filing Portal provides an online facility for filing income-tax returns using pre-filled information available in the system. Individuals may file their returns online without availing any professional assistance where their income and transactions are simple.
Consequences of Not Filing an Income-tax Return
• If the total income does not exceed ₹4,00,000 and no other filing conditions apply generally no adverse consequences arise.
• If the total income exceeds ₹4,00,000 and the return is filed after the due date a late filing fee of ₹5,000 may become payable under the Income-tax Act. Where the total income does not exceed ₹5,00,000, this late filing fee is restricted to ₹1,000. Where the income exceeds ₹12,00,000, the late filing fee may be payable along with applicable tax and interest.
• Where a return is not filed and the Income-tax Department issues a notice and subsequently finds that the total income exceeds ₹12,00,000, additional consequences such as tax, interest, late fees and penalty may arise.
Conclusion
As responsible and law-abiding citizens of India we must remain conscious of our duties in addition to our rights. Filing an income-tax return wherever required is not merely a legal formality but a small and meaningful contribution towards nation building.
A few minutes spent each year in reviewing one’s income and complying with return-filing requirements can prevent future notices disputes and unnecessary stress. Timely and voluntary compliance ensures transparency peace of mind and strengthens the trust-based tax system of the country.
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