Well, it's that time of the year again. When everyone rushes to file their returns.

In case you have been oblivious to this, here's a quick low-down on why you need to act fast.

What is the difference between an assessment year and a previous year?

Unlike calendar years which extend from January 1 to December 31, financial years are always from April 1 to March 31.

Assessment year is a period of 12 months starting from April 1 and ending on March 31 the following year. Previous year is the financial year immediately preceding the assessment year.

Income earned in the previous year is taxable in the assessment year.

Let's take an example.

Let's take April 1, 2006 to March 31, 2007 as the assessment year. The previous year corresponding to this assessment year will be April 1, 2005 to March 31, 2006.

So the income earned in the previous year April 1, 2005 to March 31, 2006 is taxable in the assessment year starting from April 1, 2006 to March 31, 2007.

What is the last date for filing tax returns?

The last date for filing tax returns for previous financial year 2005-2006 is July 31, 2006. Do note, this is only for salaried individuals. It differs for corporates.

Must I file a return even if my tax is deducted by my employer?

If your taxable income during the previous year exceeds Rs 1,00,000, then you have to file a return. If you are a female, then it goes up to Rs 1,35,000. For a senior citizen it goes up to Rs 1,85,000.

This law stays even if your employer has deducted all the taxes from your salary.

The reason being, you may have some taxable income (such as rent, interest, profits or gains) apart from your salary income and the employer may not have considered that income while deducting tax.

If you do not have any other source of income, you need to mention that in your tax return.

Must I file a return if my income is less than the lowest tax bracket?

Legally, you need not.

However, in the following cases it is advisable that you still file your tax return.

If you have a tax refund

Suppose, your taxable income is Rs 90,000. You know that tax payable on Rs 90,000 is Nil.

However, your employer has deducted tax of Rs 2,000 from your salary. So the Rs 2,000 deducted from your salary can be claimed as refund.

You will have to file a tax return to claim that refund.

If you have any losses to be carried forward

Capital losses (as against capital gains) can be set-off against the similar taxable income of future years.

Let's say you incurred a loss in share trading. You sold some shares for a lesser amount than what you bought it for. You can carry forward this loss.

But only if you file your tax return before the due date. The carried forward loss can be set-off with similar income of future years. So years down the road when you make a profit selling shares, you can set it off against this loss.

Please note that carry forward of losses is restricted to eight years.

If you plan to borrow in future

Some lenders would ask you for copies of your tax return as a proof of your income.

What will happen if you do not file your return?

If you cannot file your tax return before July 31, 2006, you can still file it on or before March 31, 2007. This is called belated return.

The disadvantages of late filing are:

1. If you have any taxes to be paid, then you would be liable to pay penal interest @1% per month under Section 234A

2. If you have incurred any losses (like one does when selling shares at a lower price than when one bought it), you are normally entitled to carry it forward. So over time, you can balance your capital gain with your capital loss. Now you cannot carry forward the losses you incurred this year.

3. If you have any tax refund, it would take more time to process.

If you delay filing of tax return beyond March 31, 2007, the tax department may charge you a penalty up to Rs 5,000.

The tax department can also issue you a notice requiring you to file your tax return. If you still do not file it, the tax officer is entitled to make a Best Judgment Assessment. This means that he can estimate your total income using his own judgement and make you pay taxes on that income.

So don't wait till it gets to that point.

ADROIT is a Pune-based firm that specialises in providing domestic and international tax services to salaried individuals and professionals. They can be reached at tax@adroitservices.in