What Are The Benefits Of Filing Income Tax Returns?
Just like books of accounts state the annual income and expenditure of a business, an income tax return (ITR) reveals your income from different sources, the arising tax liability along with details of taxes paid, and any refunds. The authorities provide you four months from the end of the financial year to compile your income and tax-related data. In case you do not file your returns within the stipulated timeline, you will attract a penalty and maybe a scrutiny from the Income Tax (IT) department.
What are the benefits of filing tax returns?
Almost every lender requires you to provide ITRs for three preceding years when you apply for a loan. This is important for lenders in order to determine your income and repayment capabilities.
Third-party accidental claims
In case of an unfortunate accident, you will need to submit the ITR to the court authorities. Your income is taken into consideration by the insurance companies during legal proceedings. If you are unable to furnish the ITR for the preceding three years, your claim amount may go down or you may even be ineligible for a claim.
Fund procurement for startups
If you want to start a new business or expand your existing business and require capital, you may approach seed investors or venture funds. Such investors may ask for your ITRs to assess the profitability of your business and your capacity to scale up operations. The ITR enables them to determine the different cost parameters and validate the figures presented in the audited reports.
The High Commissions of foreign nations in the country maintain your records, which include ITRs as well. The returns are used to determine your financial stability before providing a visa clearance. If you want to move abroad in future, you must file genuine returns every year. Even if the returns for a year are missing, it may reduce your chance of procuring a work permit or a visa.
How to save income tax by investing?
Just because you file ITR does not mean you need to pay a huge amount of taxes. There are several financial products that are beneficial in saving income tax. Here are five such investment options.
1. Tax-saving mutual funds
Equity-linked saving schemes (ELSS) offer tax benefits under section 80C. These are diversified equity mutual fund plans that invest in market securities. Although there are certain inherent risks to investing in ELSS, such tax-free mutual funds offer an opportunity to earn higher returns.
ELSS funds have a lock-in period of three years. The tax benefits are available for both lump sum investments as well as systematic investment plans (SIPs). In addition to tax benefits on the principal invested in such tax-free mutual funds, the dividends and the maturity proceeds are tax-free. These benefits make ELSS funds one of the most popular options to reduce your tax liability.
2. Life insurance policy
The premium paid on a life insurance policy is eligible for tax benefits under Section 80C of the IT Act. In addition to traditional insurance plans, term insurance and unit-linked insurance plans (ULIPs) also enjoy these tax-saving benefits. The amount paid to the beneficiary in case of an untoward incident is tax-free under section 10 (10D) of the IT Act. Moreover, if you invest in a pension plan, one-third of the maturity proceeds are tax-free.
3. Health insurance policy
The premium paid on your health insurance plan is eligible for tax deduction under section 80D. The coverage may be for self, spouse, and children. Moreover, you may be eligible for a higher tax saving, if you acquire health insurance for your senior parents.
4. Public Provident Fund (PPF)
PPF is one of the most popular ways of saving income tax. It has a lock-in period of 15 years. Contributions made to your account, up to an upper limit of INR 1.5 lakh per annum, are eligible for tax deductions under section 80C. The maturity proceeds and interest earned on your investments are also tax-free.
5. National Pension Scheme (NPS)
An amount of up to INR 1.5 lakh per year invested in Tier I account of your NPS is eligible for tax deductions. In addition, an amount of INR 50,000 per year under section 80CCD (1B) of the IT Act is eligible for tax benefits.
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