What is nil tax return? When can you file it?

When you are just at the beginning of your career and your total annual income is less than Rs2.5 lakhs per annum, filing income tax returns is not mandatory. However, you can still choose to file income tax returns for the sake of creating records. This process is called a nil income tax return. Now, the natural question to ask at this stage is why you should make the effort of filing returns when you are below the taxable limit? Here are the reasons why.

Serves as your proof of income:

Whether you are applying for a loan or getting an official document such as a passport made, you need to be able to furnish some proof of your income apart from your salary slips. You will even need to show proof of your income when you apply for visa while travelling to foreign countries. If you make it a point to file nil tax return from the beginning of your career, you are in effect creating an official record of maintaining proof of income.

To claim a refund:

There are times, when tax is deducted at source such as bank deducting TDS over interest income over Rs10,000, even though you are not under the taxable limit. In such cases you are eligible for a refund. Filing a nil return is the best way to do so. In fact, in case you have been taxed mistakenly, you are even eligible to receive interest on the amount. You are liable to receive 0.5% interest for each month on the extra sum you may have paid. However, this will be applicable only if you file your returns by the specified due date as mentioned by the Income Tax Department. If you file your returns after the due date, you will have to forego the interest.

To carry forward losses:

If you invest in the stock markets, you are allowed to offset capital losses against capital gains at a later date. This mechanism is called carrying forward of loses. However, this is only possible if you file tax returns annually to maintain the chronology of records.

Why Should you File a NIL Return?

Filing a NIL return, even when you have no taxable income, is not merely a bureaucratic task. It holds several practical advantages. Firstly, certain visa applications may require proof of income tax returns, making it essential to have a filed return on hand. Similarly, passport applications often accept ITR or Assessment Order as valid proof of address, showcasing the document's multifaceted importance.

When it comes to financial transactions, loan applications necessitate copies of ITR as supporting evidence to determine eligibility. While you might not anticipate needing a loan initially, unforeseen circumstances may arise, making it prudent to have the required documentation ready to avoid penalties or delays.

Moreover, if you earn interest on deposits in banks, they might deduct Tax Deducted at Source (TDS). To claim a refund on this deducted amount, filing an ITR becomes imperative. Similarly, as a consultant or freelancer, organizations may deduct TDS from your payments. Filing an ITR is the only recourse to claim a refund if you fall below the taxable threshold.

Section 206AB enforces higher TDS rates if you fail to file your income tax return, emphasizing the significance of regular filing. Even if your income in a given year is below Rs.2.5 lakhs, filing ITR helps maintain a chronological record, aiding in financial tracking and planning.

For those owning foreign assets, regardless of income falling below Rs.2.5 lakhs, filing an ITR is mandatory. This emphasizes the global reach and applicability of tax regulations, ensuring compliance for individuals with international financial interests.

Lastly, for those engaged in the stock market, carrying forward losses incurred is only possible when consistently filing ITRs. This demonstrates how filing NIL returns not only meets legal obligations but also serves as a strategic financial move, enabling individuals to maximize benefits, maintain financial records, and be prepared for various future scenarios.

Filing a nil tax return is a proactive and strategic financial practice, offering a range of benefits beyond just fulfilling legal requirements. It serves as a tool for financial preparedness, compliance with regulations, and a record-keeping mechanism that proves invaluable in various life situations.

How to Reduce Your Tax Liability to Zero?

Strategic planning within the framework of the Income Tax Act is crucial to minimize your tax liability. Begin by optimizing your salary structure. Incorporate tax-free components such as House Rent Allowance (HRA), car maintenance allowance, and a range of other perks. This will help you reduce it significantly - even to zero.

Allocate your investments wisely in tax-saving instruments. Consider the Employee Provident Fund and Unit Linked Insurance Plans. Further options to explore include the Public Provident Fund. Moreover, by deducting expenses such as children's tuition fees, term life insurance and health insurance from your taxable income, you actively contribute towards its minimization.

Consider the following options - a 5 year Tax Saving Deposit and the Senior Citizen Savings Scheme. Additionally, Equity-Linked Savings Scheme Mutual Funds offer an option for temporarily reducing your tax outflow. It's worth noting that some investments demand consistent contributions in order to reap their full benefits.

Filing a Nil Income Tax Return (ITR) remains advisable, even if your income falls below the taxable limit. Not only does this preempt non-filing notifications, but it may also initiate refunds for taxes deducted by banks or companies involved in big projects. With a thoughtful combination of salary structuring and strategic investments, effectively reducing your tax liability to zero is indeed possible.

How to file nil tax returns?

Filing of nil tax returns is no different for any individual than filing regular income tax returns. You can e-file your returns online in a few simple steps.

• Login to an e-filing facilitator portal with the mandatory documents. This includes your Aadhar, PAN card, Bank account details, Form 16 and details of your investments.
• Enter your personal information.
• Enter your salary details and deduction.
• Income tax is computed at this stage and it will show that you have no taxes due.
• Enter details of investments to claim deductions.
• Submit your return to the Income Tax Department.
• Send ITR-V to CPC in Bangalore to complete the process of e-filing.

So, if you have been resting easy thinking that you need not file IT returns because you have not crossed the threshold of taxable limit, you may want to reconsider your stance, as filing nil tax returns also has many advantages.