Income tax deadline looms: Know your ITR forms to avoid penalties

As the 31 July tax filing deadline approaches, individuals and small businesses are rushing to navigate the income tax website to select the correct income tax return (ITR) form.

Despite some guidance provided by the website, errors in filing can occur. Submitting the wrong form may result in the IT department rejecting it as invalid. In such cases, a revised return with the correct details can be submitted by 31 December to avoid income tax notices or penalties.

Missing the 31 July deadline can, however, result in significant consequences.

Failure to submit the ITR form on or before the deadline can incur a late payment penalty of ₹5,000, said Prakash Hegde, a chartered accountant (CA). The penalty could be ₹1,000 if total income is less than ₹5 lakh.

If there is a pending tax liability, an interest of 1% per month will be applied for late filing, in addition to 1% per month for late payment until it is settled. Additionally, losses, other than those from house property, will not be allowed to be carried forward.

Moreover, taxpayers will not be allowed to opt for the old tax regime. If the ITR is not filed by 31 December, the filer may face a much higher tax liability when filing an updated ITR.

Choosing the correct ITR form is crucial in tax filing. Here’s a guide, using fictional characters for illustrative purposes, on which ITR form to file. Note that this should not be treated as a substitute for professional advice from a chartered accountant.

A software engineer who earns ₹7 lakh per annum

For an engineer who started working last year: as it's her first job and she may have spent a portion of her income on gadgets and gizmos, with some contribution to mutual funds, without selling any units yet, which ITR form should she use?

She should ideally file an ITR-1 considering that she’s an Indian resident and her annual income is less than ₹50 lakh. Simply put, ITR-1 can only be filed if the taxpayer’s income is less than ₹50 lakh and if she does not have more than one house property.

“She may have income from other sources such as interest and dividends, (but not income chargeable at special rates like online gaming, lottery, and racehorses or losses),” said Hegde. Non-residents cannot file ITR-1.

However, there are certain exceptions to this. “Even if the taxpayer’s income is less than ₹50 lakh, she cannot file ITR-1 if she makes any profit with virtual digital assets such as cryptocurrencies, as it will be reported as capital gains,” said Nitesh Buddhadev, a CA and founder of Nimit Consultancy. “She also cannot file ITR 1 if she has unlisted shares or has assets or income overseas.”

A salaried teacher who booked capital gains from MFs

For a teacher with an annual income of ₹10 lakh, who sold some of her mutual fund holdings to refurbish her house, and realised a capital gain of ₹3 lakh from these investments: which ITR form should she file?

Considering she has no business income or side gigs, she should file ITR-2. ITR-1 does not allow reporting of capital gains, hence, she is not eligible for it. However, trading in F&O is considered business income and falls under ITR-3.

Even if long-term capital gains from equity mutual funds are below the taxable threshold of ₹1 lakh, they must still be reported in ITR-2. Therefore, in this case, if the salaried teacher's capital gains are below ₹1 lakh, and she has no other income, she must still file ITR-2.

A loss-making F&O trader

The Income Tax Act categorizes F&O income under business activities and, hence, a person dabbling in this segment needs to file the more complicated ITR-3 or ITR-4 forms, catering to business and professional income.

ITR-4 is specifically for those earning income from business or profession, opting for the presumptive income scheme.

In FY22, the markets regulator reported that nine out of 10 traders incurred losses in options trading. Does this mean that your friend who is also making losses in F&O trading does not need to report them in their ITR? The answer is 'No'.

A homemaker who earns rental income

If a homemaker's total rental income in FY24 exceeded ₹2.5 lakh, which is the income tax filing exemption limit, she must file ITR-1. This applies to rental income from only one property. If she earns rent from two or more properties, she must file ITR-2.

Note that under the new tax regime, the tax filing exemption limit is ₹3 lakh.

Income tax filing for professionals

Consider the case of a lawyer or other professionals, such as chartered accountants, doctors, or architects, who earn from clients and need to file ITR. Since they do not earn a fixed salary, they are not eligible to file ITR-1 or ITR-2.

If their annual income is less than ₹50 lakh, they can choose between filing ITR-3 and ITR-4, as their income falls under the category of 'income from business or profession'. Opting for presumptive taxation requires filing ITR-4. Similarly, firms with a total income of less than ₹50 lakh can also use ITR-4 for filing their returns.

NRIs owning a property in India

Many NRIs own house properties in India, intending to return to their motherland. What happens to the rental income when they are not around? Are they required to file returns on their rental income?

The answer is ‘Yes’ if the annual rental income exceeds ₹3 lakh under the new tax regime, and more than ₹2.5 lakh under the old regime.

NRIs can file ITR-2 and report this income under 'income from house property'. In some instances, the IT department has issued notices to NRIs for failing to declare interest earned in Non-Resident (External), or NRE accounts, even when it is tax-exempt.

In such cases, the authorities might not have had sufficient data to recognize it as exempt income, therefore, it is advisable to file an ITR, Hegde said.

Freelance content creator

If you're employed during the day, and create content as a freelancer at night, you must file ITR-3 because your freelance income qualifies as business income.

Experts classify income from content creation as income from business or profession. If you opt for presumptive taxation, you should file ITR-4.

Conclusion

Filing your ITR on time is crucial, but choosing the correct form is equally important. For taxpayers earning over ₹50 lakh, declaring assets and liabilities in the Assets and Liability (AL) Schedule, and reporting foreign assets are also critical.

Even minor omissions in reporting foreign stock holdings can trigger scrutiny under the Black Money Act. Seeking professional assistance can ensure compliance and prevent penalties. Don't procrastinate; file your returns promptly to safeguard your financial well-being.

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