Let’s understand what the implications of not filing the income tax return on time are, and the steps you can take to correct the situation.

Scenario 1: You do not have any Net Tax payable

(Net Tax Payable is any tax payable after the TDS and advance tax paid are considered)

If this is the case, you are relatively lucky!

The income tax return for a given assessment year can be filed any time till the end of that assessment year without any penalty. If it is filed after the end of the assessment year, there is a lump-sum penalty of Rs. 5,000.

For the current Assessment Year 2008-09, we are filing returns for the Financial Year 2007-08.

(Do not understand terms like Financial Year and Assessment Year? Please read “Income Tax (IT) Jargon – Financial Year (FY), Assessment Year (AY) and Previous Year (PY)”)

Even if you miss the last date of filing the return (31st July), you can file the return any time till 31st March 2009 without paying any penalty.

If you file the return after 31st March 2009, there would be a penalty of Rs. 5,000.

Scenario 2: You do have some Net Tax payable

(Net Tax Payable is any tax payable after the TDS and advance tax paid are considered)

If you do need to pay any balance tax, there is some financial implication.

The basic principle remains the same: The income tax return for a given assessment year can be filed any time till the end of that assessment year without any penalty. If it is filed after the end of the assessment year, there is a lump-sum penalty of Rs. 5,000.

On top of this, there is a penalty of 1% per month on the net tax payable.

So, if you miss the 31st July deadline of filing the return, you can file the return any time till 31st March 2009 by paying a 1% per month penalty on the outstanding tax payable amount.

If you file the return after 31st March 2009, you would have to pay a 1% per month penalty on the outstanding tax payable amount, and there would be a lump-sum penalty of Rs. 5,000.

Let’s take an example.

Say, your income tax liability for the year is Rs. 40,000.

You have TDS (Tax Deducted at Source) of Rs. 30,000, and you have paid an advance tax of Rs. 6,000.

Thus, the remaining tax payable by you is:

Net Tax Payable = Income tax liability for the year – TDS – Advance tax paid

Thus, in our example,

Net Tax Payable
= Rs. 40,000 – Rs. 30,000 – Rs. 6,000
= Rs. 4,000.

Case 1: File income tax return before the end of assessment year

Say you file your income tax return on 17th September, 2008.

In this case, you would be filing your return 2 months late (partial months are considered as full months).

Amount payable = Net Tax Payable + Interest for 2 months at the rate of 1% per month

Thus,

Amount payable
= Rs. 4,000 + (2% of Rs. 4,000)
= Rs. 4,000 + Rs. 80
= Rs. 4,080

Case 2: File income tax return after the end of assessment year

Say you file your income tax return on 4th June, 2009.

In this case, you would be filing your return 11 months late (partial months are considered as full months).

On top of this, you would be filing the income tax return after the end of the assessment year for which you are filing the return.

(Do not understand terms like Financial Year and Assessment Year? Please read “Income Tax (IT) Jargon – Financial Year (FY), Assessment Year (AY) and Previous Year (PY)”)

So, in this case,

Amount payable = Net Tax Payable + Interest for 11 months at the rate of 1% per month + Lump sum penalty of Rs. 5,000

Thus,

Amount payable
= Rs. 4,000 + (11% of Rs. 4,000) + Rs. 5,000
= Rs. 4,000 + Rs. 440 + Rs. 5,000
= Rs. 9,440

Additional Scenario: You have losses that you need to carry forward

This applies irrespective of whether you have any net tax payable or not.

(To understand carry forward of loss and set-off of losses better, please read “Set Off and Carry Forward of Losses – Capital Gains and House Property”)

If you do not file the income tax return for a year by the due date, a loss for that year can not be carried forward.

The only exception to this rule is loss from house property – this loss can be carried forward even if the IT return is not filed in time.

Thus, if you have a loss from any of the heads of income (except for the head “Income from house property”), and you file your income tax return late, you would not be able to carry forward your losses. Thus, you would lose the benefit of set off of these losses against the income of the next year.

(Please read “Set Off and Carry Forward of Losses – Capital Gains and House Property” to understand carry forward of loss and set-off of losses better)

Conclusion

Not filing a return on time does have financial implications, especially if you have a net income tax payable and / or if you have losses to be carried forward.

This can really hurt especially if the losses to be carried forward are significant.

Therefore, your best option is to ensure that you file the income tax return by the deadline.

So what if you couldn’t file your income tax return (ITR) on time this year. Come back to read “Lessons to be learnt from filing income tax return for this year” to know what you can do to make the process of IT return filing smoother next year!

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