The word tax evokes a sense of lethargy and urgency almost simultaneously.
Tax saving investments each financial year (FY) under the old tax regime were invariably done in the last quarter despite the benefits of starting earlier. That’s lethargy. In the process, urgency was immediate to complete it, invoice it and pat oneself on the back for another year managed, albeit at the last minute.
This pattern repeats in the second half of the calendar year when it is time to file tax returns. Usually, the July 31 deadline is known well in advance and yet chartered accountants every year claim to be busiest on the last day of filing for tax returns.
Thankfully, the income tax department recognises this behaviour conundrum when it comes to filing income tax returns (ITR). So to give every taxpayer a second chance, it has a process for filing belated returns.
To be sure, the ITR deadline gets extended sometimes — last year it was extended to September 16.
Consequences of late filing
Every taxpayer has an obligation to file ITR even if tax liability is nil. Missing the deadline has its own consequences.
Section 234F of the Income Tax (IT) Act 1961 sets out the fees for default in furnishing ITR. If you miss the ITR filing deadline notified for the year, then the late fee payable is ₹5,000 if you file the returns before December 31 of that year. It increases to ₹10,000 if you file it later. If your total income does not exceed ₹5 lakh, then the late fees payable is ₹1,000.
Additionally, there is an interest penalty under Section 234A of the IT Act. The department levies a 1% interest per month on outstanding tax liability, counted from the original deadline notified by the department, till filing of ITR.
If you forget to furnish your belated returns within the given time, then there is a further penalty as mentioned in Section 276 of the IT Act and there could even be legal consequences leading to imprisonment up to seven years. The reasons for delayed ITR filing can be varied. Many times it’s a personal emergency.
“For regular clients we ensure that returns are filed on time. At times delays are caused by the late availability of Form 16, incomplete information, or changes in tax utilities etc. In some cases clients must file returns to claim refunds for excess TDS deducted on interest, dividends, or other income because a lower deduction or NIL deduction certificate was not furnished. In other cases, assessees must file a revised return through condonation of delay or appeal to claim benefits, which can result in tax refunds from earlier years,” says Shruti Shah, a Mumbai-based chartered accountant.
Other than these monetary penalties, you lose the benefit of carrying forward certain capital losses for the year, any refunds which are due could be further delayed and your taxes may be subject to additional scrutiny.
The financial cost is real. According to Gautam Nayak, partner, CNK Associates LLP, “One severe fallout of filing a belated return is forgoing the benefit of carry forward of all losses, including capital losses. This penalty is harsh as the entire amount of unabsorbed losses are lost and cannot be carried forward against gains. A graded reduction in the benefit would hurt the taxpayer less. Secondly, the interest due on refunds is denied for the entire period from the beginning of FY till whenever you file ITR. Ideally, the taxpayer should not lose interest due on the refund till the prescribed last date of filing.”
The guidelines on the matter are clear, there is a direct monetary impact of late ITR filing (Table 2).
How to file belated return
Filing belated return is not complicated provided you have all the required documents such as Form 16, interest certificates, proof of investment, bank account statements, and Form 26 AS, among others.
Once you have all the documents and information on income, log on to the Income Tax e-filing portal, select the relevant Section 139(4) for belated returns and complete the return filing process as you would ordinarily.
Also keep in mind that belated returns are not the same as revised returns. Section 139 (5) of the IT Act 1961 allows individuals to correct omissions or wrong statements in an already-filed ITR. You can do so before the end of the relevant assessment year or before the completion of assessment, whichever is earlier.
Aligning tax filing with your financial goals
The new tax regime with concessional tax rates became the default regime from FY 2023-2024. However, you can still opt out and choose the old regime with its deductions and exemptions. Under the new regime, Section 80C deductions are largely irrelevant, so investments must justify their presence in your portfolio on merit rather than the tax saving they bring to table. In other words, every product bought for its tax advantage is now exposed for its utility and return benefit towards your overall financial plan.
Shah says, “With the introduction of the new tax regime the focus of investment planning has shifted from tax saving to wealth creation. LIC, PPF nolonger attract younger generation. However, one needs to evaluate the benefit of HRA and housing loan interest and principal payment under the old tax regime, as these aren’t availble in the new regime.”
The concessional rates result in a higher post-tax income, garnering a higher appeal than the earlier deductions. So, an endowment plan bought for 80C deductions may not find the same place in your financial choices when compared on the basis of utility and returns. Similarly, a home loan is tempting only to afford that dream house rather than for its tax benefits. A last-minute investment in a 15-year lock in product such as PPF just for tax saving may have fewer takers now despite its offer of income stability and capital safety.
However, the suboptimal investment choices based on tax saving, may now end up being replaced by something more unfavourable for your personal finances, Nayak says, “Under the old tax regime, the incentivised savings became a forced habit. Now that’s no longer the case and we find that the younger generation has a tendency to spend more,”.
While getting the logistics right is important, ultimately you must also consider that taxes are integral to your comprehensive financial planning.
For example, tax planning is important when you are shifting jobs for a higher pay or getting a sharp pay hike with a promotion. The additional salary could bump up your income tax slab rate, directly increasing your tax payable. Be mindful of that potential additional tax hit from the start so that you are able to provide for it rather than scrambling for funds and having to redeem investments to address additional tax payable at the time of ITR filing.
For salary earners who are moving into freelance or professional work, assess the change in tax slabs, the loss of benefits such as HRA and other reimbursements while deciding how to allocate your income towards saving, spending and investing.
Lastly, make sure to handle the tax related documents with care. Well documented ITRs are not only useful for compliance but also they help you smoothen out your future financial hurdles.
Lisa Pallavi Barbora is a freelance writer and author of Money & Her