Filing income tax return – Yes, No, Maybe?

The doorbell rang. It was Vijay, my friend. We were meeting after a long time to play our favourite game of chess.

“Vijay, I am about to finish filing my income tax return for this year. Give me a few minutes.” I request him.

“Sure. Take your time.”

He engaged himself with laying down the pieces on chess board for the game.

I finished filing the tax return, came back and sat next to him on the sofa.

“Done?”

“Yes.” I said with a feeling of great satisfaction. “Have you filed yours?” I asked inquisitively.

“No, no. I haven’t filed my income tax returns in the last 3 years.” He said as a matter of fact.

I was surprised. “Really! But why?”

“It is simple. The company where I work deducts TDS on the salary I get. There is no more tax that I have to pay. What is the need to file tax return?”

“My friend, tell me, do you have money in the bank – in your savings account or in Bank FDs.”

“Yes. I do. In fact, quite a bit.”

“You must be receiving interest on the same as well.”

“Yes.”

“You have to pay tax on that interest too.”

“What are you saying? Isn’t Bank interest tax-free?”

“Yes, it is but only upto Rs. 10,000 in a year. Having said that, you still should show it as your income in your Tax return and then claim a deduction.”

“Oh!”

“Have you sold any of your mutual fund investments or stocks or received any other income such as dividends during the year?”

“Well, yes, I did sell some mutual funds. I also received a dividend from one of the stocks I hold. But dividends are tax-free, aren’t they?”

“Yes, dividends are tax-free but you have to show them too in your tax return. And as you said you also sold mutual funds. Depending upon when you sold them, there would be capital gains involved. Were they equity mutual funds and did you sell them after 1 year of purchase?”

“Yes, that’s right.”

“Great. Since you sold them after 1 year, there is no capital gains tax. However, you have to disclose your gains in the tax return.”

“You know I am not getting this. If the capital gains and the dividend are not subject to tax, why should I be showing this in my tax return? I thought since they are exempt, I don’t need to file my income tax return. I have paid my taxes anyways.”

“Ah my friend, when it comes to filing income tax return, there seems to be a fair bit of misunderstanding. Now, it is a fact that if your taxable income is less than the minimum tax bracket, you need not file a tax return. It is not compulsory.

Having said that, everyone else should be filing his or her tax return timely, including you. I would push this a little further and say as long as you have any income (taxable or not), you should be filing your tax return.”

“What’s the point?” Vijay seemed to find this reasoning ridiculous.

“The point is that there are several benefits of filing your income tax return. Your tax return is the proof of your earnings and your financial capability. Today, if you want to take a loan, apply for a visa to another country, etc., you will have to furnish your tax returns – at least for the last 3 years.”

“But I can easily furnish my Form 16 and salary slips for such things.”

“True, you can. But how will you account for the income that you earn outside your salary, that is, from your other investments such as rent from your property, dividends, interest, etc. They are also your income. When added up they can showcase your financial capability better. Unless you add them to your tax return, they don’t play a role in the areas I mentioned before.”

“Hmmm. I understand what you are saying.”

“Not just that. You see, it is easy for the tax department to track down transactions and income based on PAN and other identity proofs. If they find any mismatch, they would ask you to file your returns with all the components included. That could lead to unnecessary hassle and probing. It is best to avoid that and keep it clean right from now itself.”

“Ah! Now that is something I would surely want to avoid.”

“Not the right motivation Vijay, but if that is what gets you going.” I was smiling. He smiled back.

“Let me tell you one more benefit. If you have paid more tax than required, you can claim a refund of the same from the Income Tax Department. However, you can do it only by filing a tax return.”

“So, how do I do it? I have no idea about filing income tax return.” The smile turned faint.

“It is not a problem at all. Let me tell you that the tax return filing process these days has become very simple. You can do it online, by yourself and that too on the Income Tax Department’s website.”

“Wow! That’s quite a progress!” Vijay winked.

“Oh yes! When you visit the website of Income Tax E-filing, you will find everything on filing income tax return laid out neatly in sections for how to register, which forms to file, FAQs etc.”

“OK. And what all information would I need to submit?”

“All your income details through any means, that is, salary, rent, dividend, interest, capital gains, etc. You should keep your bank statement ready for calculating the interest you received. You should also have your Form 16 issued by your company along with Form 26AS which shows the tax credits in your name. That will give you most of the details you need for filing your income tax return under Income from Salary.

Dividends, interests from savings account or Fixed Deposits, etc. have to be entered under Income from Other sources.

Your short-term capital gains information such has to be entered under Schedule CG-Capital Gains.

Exempt Income such as long term capital gains or insurance receipts should be entered under Schedule EI-Exempt Income.

You will also have to enter any deductions against investments or expenses under Section 80C/80D and others that you have claimed under Schedule VI-A.

As for the tax that has already been paid on your behalf through TDS on salary, etc., based on your PAN, those details would automatically be captured by the system.

“That sounds like a lot. But I hope there is a structured way to fill this all.”

“Yes, there is. There are different Forms that have to be used based on the sources of income you have. You have to select the correct Form. So for example, if you only have income from salary and one house property, you could use ITR -1. In case, you have income from salary, more than 1 property and capital gains, etc. then you should use ITR 2.”

“So, in my case, I guess ITR-2 will be applicable.” Vijay asked to confirm.

“I think so too.

Now once you have entered all the information, you can verify the same online using your Aadhar. You will receive an SMS and email confirmation of your submission as well as when the return is processed.

If there is a refund claim, it would be directly credited to your bank account. It all works pretty fast these days. In case the tax department has queries on your submission, it will get in touch with you for the same.”

“Wow! It does sound very professional and super easy. Let me try it out today itself. I will give you a call in case I face any issue.”

“Sure Vijay. In fact, you can also send your queries to their Help Desk. They usually revert within 24 hours.”

“Unbelievable!” Vijay was amazed.

“OK Vijay. Should we get back to our game of chess now?”

“Oh yes. Lets.”

I later shared with Vijay this checklist from IncomeTaxIndia website. 

The last date for filing income tax returns for this year is July 31, 2016.