ITR Filing: What is ‘NIL’ tax return and when should you file one?

Individuals who get exemption from paying taxes can file Nil ITR

Income Tax Return (ITR) filing deadline is approaching fast and taxpayers are busy arranging various necessary documents, including Form 16 and 26AS, for filing of tax returns. The ITR filing deadline, like in previous years, is July 31. When it comes to filing tax returns, many salaried and non-salaried individuals, especially first-time taxpayers, often get confused about whether or not they are supposed to file income tax returns. Certain individuals are exempt from paying taxes under income tax laws, resulting in zero or nil tax liability for them.

Who qualifies to pay NIL tax and file NIL return?

According to income tax provisions, individuals whose income is below the tax exemption limits — currently Rs 3 lakh under the new tax regime and Rs 2.5 lakh under the old tax regime — are exempt from filing tax returns. So technically, they are paying NIL or Zero tax.

Under Section 139(1) of the Income-tax Act, 1961, individuals whose income is below the basic exemption limit are not required to file income tax returns. This exemption is provided to such individuals as they do come under any taxable brackets. But if they still wish to file returns despite being out of the taxable income net, they can file income tax returns called ‘NIL’ returns. While filing nil returns is not mandatory, there are several benefits associated with doing so.

The basic tax exemption limit depends on the tax regime one chooses, as well as the age of the taxpayer.

Under the old tax regime, basic exemption limit for taxpayers, under different age groups, is as follows:

Under the new tax regime, the central government in Union Budget 2023 raised the basic exemption limit to Rs 3 lakh from Rs 2,50,000 set earlier.

Why does one file a NIL return?

Individuals without any tax liability are free to file ‘NIL’ income tax returns. Filing of returns by them helps the tax department come to know that these individuals have no taxable income and thus filed NIL or Zero return for a particular financial year. According to the Income Tax Act, those with incomes less than the basic exemption limit are not required to file an ITR, but despite that many file ITR just to get advantage of many benefits on account of return filing.

There are several advantages of filing an ITR even if you are not liable to file one because your income is below the basic exemption limit. The proof of having filed an income tax return helps you in many ways. You can use income tax return proof or acknowledgement for easy loan processing, address proof, quick visa processing, buying a term insurance, etc.

Even if you are not liable to file a tax return, you can file a return for the sake of maintaining a record for yourself as your income will grow in future and then you will be required to file a return. Maintaining a record of tax return filing also helps as a precautionary measure against any notice or scrutiny in future by the income tax authorities. Another important aspect of filing ITR is that it helps in carrying forward losses incurred in the stock market or business. Non-tax filers are not allowed to carry forward such losses to the next fiscal year.

Additionally, you may need to file a return to claim a refund if your total income before deductions exceeds the taxable limit but deductions bring it below. This situation may occur if you’ve paid more in taxes through TDS than necessary, making it essential to file an income tax return for refund purposes.

Steps to file a NIL return follow the same process as filing a regular income tax return.