What is a NIL Return & How to File NIL Income Tax Return?

What is a NIL Return?

A NIL return is an income tax return filed by a taxpayer to declare to the tax department that they have had no taxable income during a financial year, or their income was below the basic exemption limit. Essentially, it signifies that you have no tax liability for that particular year.

While it might seem counterintuitive to file a return when no tax is due, filing a zero tax file return serves several important purposes, such as maintaining a record of financial activity and fulfilling a necessary requirement for various applications such as loans or visas.

Furthermore, even if your income is below the exemption limit, you might still want to file a NIL return if you have had Tax Deducted at Source (TDS) and wish to claim a refund.

It is important to note that income tax slabs and exemption limits can change. Taxpayers usually have the option to choose between an old tax regime (with various deductions and exemptions) and a new tax regime (with lower tax rates but fewer exemptions). The basic exemption limit varies based on the chosen regime and the taxpayer’s age.

Below is an illustrative table based on information available for FY 2024-25 (AY 2025-26) under the old regime.

Budget 2025 Update

The Union Budget for 2025 has proposed significant changes to the new tax regime, which will be applicable from Financial Year 2025-26 (Assessment Year 2026-27). These changes aim to simplify the tax structure and increase disposable income for many taxpayers.

Key highlights of the proposed changes for the new tax regime for FY 2025-26 include:

• Increased Basic Exemption Limit: The basic exemption limit is proposed to be raised from ₹3 lakh to ₹4 lakh.
• Revised Tax Slabs: New tax slabs have been introduced. For example, income between ₹4 lakh and ₹8 lakh may be taxed at 5%, and income from ₹8 lakh to ₹12 lakh at 10%. The highest tax rate of 30% will now apply to income above ₹24 lakh, as opposed to earlier thresholds.
• Increased Rebate under Section 87A: The tax rebate under Section 87A is proposed to be increased significantly. For individuals with a taxable income up to ₹12 lakh, the rebate could result in zero tax liability. Moreover, for salaried individuals, factoring in the standard deduction, the tax-free income threshold could effectively be ₹12.75 lakh.

Below are the proposed income tax slabs under the new tax regime for individuals:

When should I file a NIL Return?

Filing a NIL return indicating that you have no income to report for a particular tax period might seem unnecessary, but it is a crucial practice for maintaining good standing with tax authorities and ensuring compliance with legal requirements. Here are three main reasons why you should file an NIL ITR:

To Utilize an Income Tax Return As Evidence of Income

• Maintaining records is prudent for a newcomer with income below taxable thresholds, especially for visa applications or passport issuance.
• If you have been filing taxes for years and now fall below taxable limits, continuing to file ensures documentation and readiness for potential Income Tax Department reviews.

To Seek a Refund

• Even if your income before deductions could surpass taxable thresholds, deductions may keep you below the exemption limit.
• If excess taxes were deducted via TDS, filing an income tax return is necessary to request a refund.

To Carry Forward Losses

• Filing a NIL ITR officially documents your eligible losses, such as capital losses or business losses, allowing you to carry these losses forward and set them off against future taxable income or gains, effectively reducing your tax burden in subsequent years.
• Without filing, these losses cannot be used to offset future profits. By submitting a NIL ITR, you activate the ability to use these losses, ensuring you get tax deductions when you do have taxable income.

Can I go Without Filing a Nil Return?

While you might not face immediate penalties if your income is truly below the basic exemption limit and no specific conditions, such as holding foreign assets or having TDS deducted, mandate filing, it is generally advisable to not skip the zero tax filing. Not filing means you could miss out on important benefits such as creating an official income record, the ability to claim tax refunds, or carrying forward losses for future adjustments. Filing, even with no tax due, is a proactive step for financial planning.

How to File a NIL Income Tax Return Online?

Filing a NIL Income Tax Return (ITR) follows the same process as filing a regular ITR. Here is a clear guide on how to file income tax return for zero tax online:

Preparation: Gather Your Documents

Before starting, ensure you have these documents ready:

• PAN (Permanent Account Number)
• Bank Account Details
• Salary Details (if applicable)
• Aadhaar Number
• Form 16 (if TDS was deducted by your employer)
• Investment Details (for deductions under sections like 80C, if applicable)
• Procedure to File NIL ITR Online

Visit the Official Income Tax e-filing Website

• Go to the Income Tax Department’s official e-filing website.
• Log in using your registered user ID (typically your PAN) and password. If not registered, complete the registration process first.
• Navigate to the e-Filing Section
• Once logged in, click on the ‘e-File’ menu and select ‘Income Tax Return’.
• Fill in Income and Deduction Details
• Choose the assessment year for which you are filing.
• Select the appropriate ITR form (e.g., ITR-1, ITR-2) based on your income sources.
• Enter your income details and deductions. For a NIL ITR, ensure your taxable income after deductions is below the basic exemption limit.

Calculate Income Tax

• After entering all relevant information, the system will calculate your tax liability.
• Verify that it shows zero tax due, indicating no tax liability.
• Submit the Return
• Review all details and submit your ITR.
• You will have the option to e-verify your return immediately.

E-verify Your Return

• Complete the e-filing process by e-verifying your return using available methods (Aadhaar OTP, Net Banking, Bank Account, Demat Account).
• Alternatively, if e-verification is not possible, download the ITR-V (acknowledgment) form, sign it, and send it by post to the Centralized Processing Center (CPC) in Bengaluru within 120 days of e-filing.

Benefits of filing NIL ITR Returns

Here are the benefits of filing a NIL Return:

• Income tax documents serve as proof of income.
• Income proof supports passport or visa applications.
• NIL return filings are useful when applying for loans requiring multiple years of ITR.
• Filing a NIL ITR allows claiming tax refunds on bank TDS deductions from interest on deposits.
• Freelancers or consultants subject to TDS despite low income benefit from filing a NIL ITR, securing tax refunds, and saving.
• Investors with annual incomes below ₹2.5 lakhs can carry forward stock market losses to offset future capital gains taxes.
• Owners of foreign assets must file an ITR, regardless of income bracket.

Due Date to File NIL Income Tax Return

Individuals must file a NIL return by July 31st of the Assessment Year, aligning with regular return deadlines. Filing after this date classifies it as a belated return, though no late fees apply for belated NIL ITR.

How to Reduce Your Tax Liability to Zero?

Reducing your tax liability to zero involves strategic financial planning and leveraging various tax-saving options. In this section, we will explore the effective methods for minimizing your tax burden and maximizing your savings.

Optimize Your Salary Structure

Optimizing your salary structure can significantly impact your taxable income. Consider these strategies:

• Salary Components: Allocate a portion of your salary towards tax-free allowances such as HRA (House Rent Allowance) and LTA (Leave Travel Allowance).
• Flexible Benefits: To reduce taxable income, opt for flexible benefits like meal vouchers, medical reimbursements, or conveyance allowances.
• Employee Benefits: Maximize deductions under Section 80C for contributions to EPF (Employees’ Provident Fund) and PPF (Public Provident Fund).

Invest in Tax-saving Deposits

Investing in tax-saving deposits offers the dual benefits of savings and tax deductions:

• Fixed Deposits (FDs): Consider investing in Tax-Saving Fixed Deposits offered by banks with a lock-in period of 5 years, which qualify for deductions under Section 80C.
• Senior Citizen Savings Scheme (SCSS): If eligible, invest in SCSS for higher interest rates and tax benefits under Section 80C.
• National Savings Certificate (NSC): NSCs are low-risk savings instruments offering tax benefits, ideal for conservative investors.

Explore Other Tax-saving Investments

Diversify your tax-saving portfolio with these investment avenues:

• Equity-Linked Savings Scheme (ELSS): ELSS funds invest in equity markets and offer tax benefits under Section 80C, with the potential for higher returns over the long term.
• Public Provident Fund (PPF): PPF combines tax benefits with long-term savings, providing tax-free interest and deductions under Section 80C.
• Unit-Linked Insurance Plans (ULIPs): ULIPs offer the dual benefits of insurance coverage and investment growth and are eligible for tax deductions under Section 80C.

Conclusion

Filing a NIL Income Tax Return is a straightforward process to ensure compliance with tax laws and maintain accurate financial records. Following the steps outlined above in this guide, taxpayers can efficiently file their zero income tax return online and benefit from exemptions, refunds, and other financial advantages. Consult with a tax advisor for personalized guidance and maximize your tax-saving opportunities while complying with regulatory requirements.

FAQs on How to File NIL Income Tax Return