Filing Income Tax returns can be considered a universal problem for everyone who earns money. Rich people worry about the taxes. Middle-class wage earners also worry about taxes and eventually try various ways to evade them. But one should not forget, Tax Evasion is illegal and serious offense hence, discouraged by the authorities. Therefore, I thought of highlighting the 7 important reasons for filing Income Tax Returns on time.
Before understanding the reasons for filing Income Tax Returns, we should know why people refrain from filing Income Tax Returns. Because that is the root cause of all the troubles people get into with the tax department. Filing Income Tax Returns is the responsibility of every citizen. There are more benefits of filing than the drawbacks of not filing Income Tax Returns.
Disclaimer: The reasons listed down below are as per my experience and should not be taken as it is. Always reach out to a professional for tax advice as I am not a certified professional.
Here Are The 4 Reasons Why People Refrain From Filing Income Tax Returns:
The Stigma That The Process Is Extremely Complicated
One of the most prominent reasons why people refrain from filing Income Tax Returns is the burden of paperwork and complexities in the process. For a tax professional who spends thousands of hours studying (theory and practice) this feels like a piece of cake. But for a general person who is not familiar with the commerce background, it might be a herculean task.
In the Indian scenario, we are observing that the government is trying to ease the process as much as possible. Year after year we observe the government integrating automation in form filling. The data is generally auto-fetched based on the PAN (Permanent Account Number) and AADHAAR Card. Individual needs to cross-check the details and submit by making a number of clicks. This is easier for people having the only source of income as ‘Income from Salaries. The employers generally take care of the tax provisions and issue Form-16 for filing Income Tax Returns.
People having multiple sources of income should rely on tax professionals. But in totality, the process is not complex at least in the Indian scenario. Feel free to share the tax filing situation in your country through the comment section.
The Assumption That The Income Is Lower Than The Threshold
The second reason why people refrain from filing Income Tax Returns is that they assume their income to be lower than the threshold. India follows a progressive tax system when it comes to income tax. The tax liability and income tax rates differ for people having different income brackets.
People get confused between tax brackets and Income Tax Returns. They assume that their total earnings in a financial year are less than the threshold, they do not need to file ITR. That is wrong. There is a provision of filing zero ITR. This translates to no income tax liability. And your ITR is a declaration of the same to the Income Tax Department.
Therefore, even if you consider your total income to be less than the threshold, you should be filing the Income Tax Returns within the deadline.
Disclosing The Income May Get Us In Trouble
The third reason why people refrain from filing Income Tax Returns is the fear of disclosing the income. This fear makes them believe that one might get in trouble if the income is disclosed. That is not the case if you have a legal and legitimate source(s) of income.
The Income Tax department will usually have access to the details of your income. They also have the access to your bank accounts and they assert the right to intervene if required. Therefore, disclosing income from your end will work in your favor and help in avoiding audits.
The income tax department is not behind anybody’s money as long as they have the legal and legitimate source of that income. Moreover, if you are not only voluntarily disclosing the income but also paying advance tax then you are likely to get refunds if the tax liability is less than the advance tax that you paid. In a nutshell, the tax department generally does not retain any amount more than an individual’s tax liability. I know this for a fact because I have received refunds from the income tax department.
Tax Professionals Will Charge Higher Fees
Tax professionals like any other professional charge fees for their services. These fees can differ from professional to professional. The general notion that people have about filing Income Tax Returns is that the tax professionals will charge higher fees for processing and filing ITR.
The answer to this is not simple. It depends upon the tax professional you are reaching out to. In addition to that, if you have any backlogs which need to be covered. Lastly, the nature of income that you have and the number of hours the professional will need to spend on your case. But as mentioned initially in the blog post, in India, an individual can easily file the ITR online. Apart from that if you have multiple sources of income then it is wise to get the same done from a professional.
When it comes to the fees charged by the tax professional(s) if your tax liability is high then the fees are comparatively less. Because if you do not file the ITR then the Income Tax department can impose fines and penalties which can lead to more outflow of cash than what you were initially required to pay. Therefore, you should compare the potential penalty you might be required to pay vs. the fees, and the majority of the times you would find the fees to be lesser than the penalty. Moreover, you can try to negotiate the fees with the tax professional to get a discount.
Here Are The 7 Reasons Why We Should File Our Income Tax Returns On Time:
Helps In Declaring Income From All The Sources
You might think if the government already has information about the income then what is the need for filing Income Tax Returns? Why do we need to declare the income? Because there can be a discrepancy between the data that the tax department has vs. the actual data. Moreover, if you have made an investment for tax purposes then the same needs to be deducted to ascertain the net taxable income. The income tax is calculated on the net taxable income.
By filing the ITR on time, you are declaring not only the income but also the investments made throughout the year to bring down the tax liability. There are numerous investment options available that are allowed as deductions. By declaring the income and investment you are keeping the accounts clear and helping the tax department to evaluate your tax liability.
If there is any discrepancy in the records, the tax department will reach out to the individual to get more clarification otherwise the ITR will be processed successfully. As a result, one should file ITR on time to declare the net income earned through one or all the sources of income.
Keeps Us In The Good Books Of The Revenue Department
If you are presented with a choice that can put you in the good books of the income tax or government revenue department, then would you choose that? If the answer is yes, then it is the next reason for filing Income Tax Returns on time.
The government department will have data pertaining to all the individuals, whether they are filing or not filing the ITR? On the basis of this, there are considered to be several lists made by the government department to segregate the individuals. If a person is failing to file ITR year after year then such people will be included in one list. If a person is filing the ITR year after year without fail then such people will be included in a separate list. And some other lists like defaulters, advance taxpayers, highest taxpayers, etc.
Filing ITR on time even with a zero liability increases your chances of getting your name in the good books of the Income Tax Department. This means that you are fulfilling your duty as a law-abiding citizen.
It Helps In Boosting The Economy
The third reason why we should file the ITR has to with how the government spends the amount collected from the income tax. The amount that we pay as Income Tax gets collected by the government. This serves as one of the sources of revenue for the government. This amount is further utilized for public expenditure like building bridges, improving infrastructure, building schools, create employment opportunities, and much more. All of this leads to the growth of the economy. That is why we often hear the expression ‘taxpayers’ money being utilized’.
By filing ITR and paying the exact tax amount that you are liable for you are helping the government to boost the economy. Your contribution can help the economy to grow and enable the government to spend more on public expenditure. Eventually, it will make your life easier as there would be better transport facilities, better education, and healthcare services.
Makes It Easier To Get Loans From The Banks
If you are planning to buy a house or a car or start a business and you are in need of loans/advances from a bank then ITR is one of the important documents. Typically, the banks request ITR for the past three financial years. This helps the bank in assessing the credibility of the loan applicant, financial stability, and gross income of the applicant. In some cases, I have also observed that submitting ITR can also save you some interest on a loan as the interest rates will be less by some base points.
Apart from this, if you are buying any capital asset like real estate, then the registrar may ask you to submit the ITR statements. All of this is to assess the financial stability and check the creditworthiness of the individual.
have also come across examples where individuals had to pay more money to the tax professionals to complete the backlog of arrears of ITR to obtain the loan. This extra payment in fees and fines could have been easily avoided if the ITR was filed on a regular basis. Therefore, filing Income Tax Returns on time can save you all this trouble and save some extra money in the long run.
Useful In Case Of Visa And Work Permits For Foreign Countries
Are you planning to apply for a visa or work permit for a foreign country? If the answer is yes, then again ITR can prove to be a substantial document as proof of fund. Many of the consulates and embassies make it mandatory for the applicant to submit the ITR for the past three years along with bank statements for the past six or twelve months.
The reason behind this requirement is to ascertain the financial stability of the applicant and whether they have sufficient funds to survive in the respective country. I know about this because I have been working in the immigration sector for quite some time and have seen individuals struggling to submit the ITR because they have not filed their income tax returns on time.
Therefore, even it might feel like a struggle to file ITR every year, one should do it religiously to avoid uncertain and unfavorable situations in the future. Because you never know when and how this document might come in handy.
Helps In Getting A TDS Refund (Depending On Tax Liability)
TDS is Tax Deducted at Source. Sometimes the employers, as well as government authorities, deduct TDS on the amount you are eligible for in case you were unable to submit relevant details pertaining to tax deductions and exemptions. For example, if you do not submit the investment details to the HR department of your organization then as per the norms the employer can deduct TDS at a pre-determined rate.
But this TDS can be refunded if your tax liability is less than what the organization has documented or even zero. In order to get this refund, the main condition is filing Income Tax Returns. Not only filing ITR but also filing it within the due date decided by the government. Failure to file it within the due date may disqualify you from being eligible to get the refund.
In some cases, the TDS amount may go up to one month’s salary and hence it can have a great financial impact. Therefore, if you are making tax-saving investments then initially submit the details to the HR Department of your organization. If you fail to that then declare those investments at the time of filing ITR. This will help the Income Tax department to clearly assess your tax liability and refund any excess amount received from the employer on your behalf.
Helps To Set Off Capital Losses
Apart from all the reasons mentioned above, there can be instances when you have made huge losses in business or in general. In the taxation system, there is a provision that allows you to set off these capital losses against future profits that you may generate for a specific period of time.
In order to avail of this benefit, one needs to file the Income Tax Returns on time. If you fail to do that then you will not be able to set off these capital losses. The provisions regarding this may differ from country to country as each country will have its own Income Tax rules and regulations.
Irrespective of which country you reside in, if you are earning money throughout the financial year or during the financial year then it is your responsibility to declare the same to the tax department. Not only that, if you have a better understanding of the norms then file the ITR and pay the tax liability. If you are uncertain about the taxation then take assistance from a Tax Professional but complete the action from your end.
Have a look at the Income Tax Growth in India from Assessment Year 2017 to Assessment Year 2021: