Tax Filing Rules: Should You File Returns If Your Income Is Under the Exemption Limit?

Filing income tax returns (ITR) is generally associated with those who earn above the taxable income limit set by the government. However, many individuals who fall below the exemption threshold may still benefit from filing a tax return. While it may not be mandatory in many cases, filing a tax return voluntarily can offer financial and legal advantages. This guide will explain:

• Who is exempt from filing tax returns
• Why filing ITR is still beneficial even with lower income
• Specific situations where it is legally required
• How to file ITR online when your income is below the taxable limit

Let’s break down the rules and advantages of filing ITR, even when your income falls below the exemption threshold.

Income Tax Returns: Filing Even with Income Below Taxable Limits 

What Is the Income Exemption Limit for Tax Filing?

The income tax exemption limit depends on your age and taxpayer category as per the latest tax rules:

Note: In the Union Budget 2025, the limit for basic exemption has been increased to ₹4 Lakh from ₹3 Lakh for all age groups under the new tax regime.

If your total annual income falls below these limits, you are not legally required to file an ITR. However, certain conditions may still make filing necessary.

When Is Filing Tax Returns Mandatory Even Below the Exemption Limit?

You must file an ITR even if your income is below the taxable limit in the following cases:

1. If You Have Foreign Assets or Income
   • If you own foreign bank accounts, investments, or properties, tax authorities require you to declare them, even if your income is below the exemption limit.
2. If You Have Earned Capital Gains
   • Even if your total income is below the exemption limit, any capital gains from selling stocks, mutual funds, or property require you to file a tax return.
3. If You Have Spent More Than ₹2 Lakh on Foreign Travel
   • If you have spent ₹2 Lakh or more on foreign trips, you must file an ITR regardless of your income level.
4. If You Have Deposited Large Amounts in a Bank Account
   • Large bank transactions trigger a requirement to file an ITR to explain the source of income. The limits are ₹50 Lakh for a savings account and ₹1 Crore for current accounts.
5. If Your Electricity Bill Exceeds ₹1 Lakh in a Year
   • High-value electricity consumption indicates significant financial activity, making ITR filing necessary.
6. If You Have Claimed a TDS Refund
   • If your employer or bank deducted income tax (Tax Deducted at Source) and your total income is below the exemption limit, filing an ITR is required to claim a refund.

Benefits of Filing Returns with Income Below the Exemption Limit

Even if your income is below taxable levels, there are several advantages to filing ITR voluntarily:

1. Helps You Claim Tax Refunds

If TDS was deducted from your salary, interest income, or investments, you must file an ITR to claim a refund. Banks deduct TDS on Fixed Deposits (FDs) when interest exceeds ₹40,000 (₹50,000 for senior citizens up to March 31, 2025. From April 1, 2025, it is ₹1 lakh), even if your total income is below the exemption limit.

For example: Suppose your bank deducted ₹5,000 as TDS on FD interest, but your total income was just ₹2 Lakh. Filing an ITR allows you to claim a refund of ₹5,000.

2. Establishes a Financial Record for Loans & Credit Cards

Many banks require past ITRs to approve loans, credit cards, or large financial transactions. Filing ITR regularly helps build financial credibility.

For example: If you plan to apply for a home loan in the future, banks may ask for your last 2-3 years' ITR records, even if you are a freelancer or earning below the taxable limit.

3. Required for Visa Applications

Many countries require ITR proof for visa processing, especially for business or long-term travel visas. Having regular tax filings improves your chances of visa approval.

For example: If you apply for a US or UK visa, the embassy might ask for past 2 years’ ITR records to verify financial stability.

4. Helps Carry Forward Capital Losses

If you have capital losses from stocks, real estate, or mutual funds, filing an ITR allows you to carry forward these losses for future tax adjustments.

For example: if you sold stocks at a loss in 2025, you can use this loss to reduce tax liability on future gains — but only if you file an ITR.

5. Avoids Future Tax Scrutiny

Regular ITR filing prevents tax authorities from flagging your financial transactions. If your income rises in later years, having a consistent tax record avoids unnecessary scrutiny from the Income Tax Department.

When It’s Beneficial to File Tax Returns Despite Exempted Income

Filing an ITR is beneficial even if it’s not mandatory, particularly for:

• Freelancers & Gig Workers: If you work as a freelancer, even with an annual income below the exemption limit, filing ITR ensures smooth future financial planning.
• Students Earning Part-Time Income: Filing ITR early helps in financial record-building for future career opportunities.
• Homemakers with Investment Income: If you earn from FDs, mutual funds, or rental properties, filing ITR helps claim tax benefits and refunds.
• Retired Individuals with No Pension: Filing ITR ensures smooth inheritance and estate planning, making financial documentation simpler.

How to File Tax Returns When Your Income Is Below the Exemption Limit

If you decide to file an ITR voluntarily, follow these steps:

1. Step 1: Collect Required Documents:
   1. PAN & Aadhaar Card
   2. Bank Statements
   3. Income Proof (Salary Slips, FD Interest Certificates, Capital Gains Statements)
   4. Form 16 (if applicable)
2. Step 2: Log in to the Income Tax e-Filing Portal
   1. Visit www.incometax.gov.in.
   2. Click on ‘File Income Tax Return’.
3. Select ITR Form (Usually ITR-1 for salaried individuals, ITR-2 for capital gains).
4. Step 3: Fill in Income Details
   1. Enter salary, interest income, capital gains (if any).
   2. Verify tax deductions and exemptions.
5. Step 4: Claim Tax Refund (If Applicable)
   1. If TDS was deducted, mention it under ‘Tax Paid’ to claim a refund.
6. Step 5: Submit & E-Verify
   1. ✔ Complete Aadhaar-based e-verification or upload signed ITR-V.

Conclusion

Even if your income is below the taxable limit, filing an income tax return online has multiple benefits. Whether you need loan approvals, tax refunds, visa processing, or financial credibility, an ITR serves as proof of income and financial stability.

Voluntarily filing ITR ensures you stay financially prepared and tax-compliant, preventing future legal or financial hassles. If you earn from multiple sources or have tax-deducted income, filing an ITR is always a wise decision.