What is Income Tax Return and why filing ITR is important in India?

Updated on: 17 July 2023

Published on: 29 June 2023

An income tax return or ITR is an essential form that you, as a taxpayer, need to file when declaring your income details and the applicable tax information to the IT Department. According to the Income Tax Act of 1961, all individuals, companies, HUFs, association of persons, etc., needs to pay tax depending on the income they earn.

As an Indian resident, you are bound to follow tax regulations based on the total income you earn in a specific financial year starting on the 1^st of April and ending on the 31^st of March of the next year. However, there are certain rules you need to abide by when filing an ITR. 

For a brief overview of what is ITR and the process of filing income tax returns in India, read on.

What is income tax return?

As a taxpaying citizen of the country, you need to submit an income tax return to the Income Tax Department. This form lists the income you generate during a particular financial year. The income you have earned may include the following:

• Income earned from salary
• Income generated from capital gains
• Income gained from your house property
• Any profit you have accrued from your business
• Income earned from various other sources in the form of dividends, royalty income, etc.

You need to file these particulars in a clear and concise manner and declare the same to the IT Department. That said, there are specific forms to be used when filing an income tax return in India. The IT Department has categorised the applicability of these forms based on parameters, such as:

• The category to which the taxpayer belongs to
• The income source of the taxpayer
• The total amount of income generated

It is important to file your income tax returns on or before the due date. But before that, you need to understand the 7 different forms for filing income tax returns.

What are the different ITR forms available?

To date, the IT Department has notified the following forms that a taxpayer can use for filing income tax returns. Here are the seven different forms:

• ITR-1
• ITR-2
• ITR-3
• ITR-4
• ITR-5
• ITR-6
• ITR-7

Here’s a brief description of each form to help you understand them better:

ITR-1

This form is suitable for all resident individuals earning an income of less than ₹50 lacs. You can generate this income from your pension, salary, one property or other sources like winning lotteries or horse races.

ITR-2

Any income generated above ₹50 lacs needs to be filed using this form. All your capital gains, income earned from more than one property, foreign or even crypto income needs to be declared using Form ITR-2. 

Generally, all HUFs and individuals are eligible to file ITR-2 if ITR-1 does not apply to them and if they do not have any income gained from business or profits.

ITR-3

This form has to be filed by individuals and HUFs generating income from the gains and profits earned in a profession or business.

ITR-4

This is applicable for HUFs, resident individuals and all firms (excluding LLPs) who are earning income up to ₹50 lacs along with income generated from profession or business.

ITR-5

This form is applicable to LLPs (Limited Liability Partnerships), BOIs (Body of Individuals) and AOPs (Association of Persons). 

ITR-6

All companies not claiming any exemption under Section 11 needs to file this form for income tax returns. 

ITR-7

All companies and individuals included under specific sections must file their returns using this form. The categories include Section 139(4A), Section 139(4B), Section 139(4C) and Section 139(4D).

Why is filing an ITR mandatory?

Filing an ITR in India is critical if the income you earn during a financial year is higher than the basic exemption limit. When you delay filing your tax returns, it can attract penalties and affect your chances for visa or loan approvals. So, ensure you file your returns with due diligence well before the timeline. 

Here are a few conditions applicable for filing an ITR:

• If your gross income for a particular year exceeds ₹2.5 lacs and you are an individual below 60 years, ₹3 lacs and you are above 60 but less than 80 years and ₹5 lacs if you are above 80 years
• If you need to apply for any form of credit or a visa
• If you run a company, regardless of whether or not it is generating profit or loss
• If you need to claim a refund for the excess tax paid from the IT Department
• If you have invested in foreign assets during a financial year

The aforementioned conditions are a few of the reasons why filing an ITR is mandatory. You can file your returns in paper format or furnish them electronically using a digital signature. You can also transmit the data electronically using an electronic verification code. Another option is to transmit it electronically and then submit verification of the returns filed using a Return Form ITR-V.

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FAQs on filing income tax returns in India

Who is eligible for ITR?

All individuals and businesses in India need to file ITR if their gross annual income is higher than the basic exemption limit.

What are the different types of ITR?

There are 7 different types of income tax returns based on the category, income earned and source of income of a particular taxpayer.

What is the purpose of filing an ITR?

Filing your ITR helps you claim tax refunds from the IT Department, if applicable. It also helps you record your total earnings generated during a financial year.

What will happen if we don’t file ITR?

If you don’t file ITR, you may have to pay penalties. Also, it may delay your visa or loan approval process.

How to file an income tax return?

You can file your returns in paper format or furnish them electronically using a digital signature or an electronic verification code. You can visit the official Income Tax e-filing portal to do so. Another option is to transmit it electronically and then submit the verification of the returns filed using a Return Form ITR-V.

What is the difference between ITR and income tax returns?

There is no difference between the two, as ITR is an acronym for Income Tax Returns.

Who is eligible to file an income tax return?

All Indian residents earning a total income above the basic exemption limit are eligible to file income returns.

Is it compulsory to file ITR?

Yes, it is mandatory to file ITR if you are earning income that crosses over the exemption limit.

Is it mandatory to file income tax returns below ₹5 lacs?

As per the new regime, you need not pay any tax for a total income of up to ₹3 lacs. However, if you are earning income above ₹3 lacs and below ₹5 lacs, you have to you’re your returns.