The savvy set: How one category became India's fastest-growing taxpayer tribe
Individuals with diverse streams of income including rent from multiple properties, capital gains from shares or property or have foreign income or assets, but are not businessmen or professionals, are the fastest growing tribe of income tax payers, indicating the changing make-up of India's tax base.
Latest data from the income tax department show that after the pandemic, their share in total tax returns filed in a year has doubled to 14% in the FY25 assessment year. In every assessment year since FY21, this class remained the fastest growing set of tax return filers, showing their deeper participation in investment activities.
In absolute terms, the number of income tax return 2 (ITR-2)—the form used for reporting individuals' income that is more than ₹50 lakh which includes capital gains or rent from more than one house property or foreign income—has jumped from 4.75 million from the FY21 assessment year to 12.17 million in FY25 assessment year, showed data from the department.
ITR-2 upsurge
In the FY22 assessment year, ITR-2 filings swelled more than 27%, reporting the income earned in FY21. In an assessment year, the income earned in the previous financial year is reported and any pending tax is paid. In the FY23 assessment year, ITR-2 filings jumped by more than 30% from the year-ago period. In the following assessment year, the growth was about 14%.
In the meantime, the number of tax returns filed by individuals with salary income up to ₹50 lakh but without any of these additional revenue streams of ITR-2 filers, grew from 31.65 million in FY21 assessment year to 35.97 million in FY25, but their share in the overall returns filed shrank from about 49% to about 43%.
Extensive reporting
The trend comes in the wake of extensive use of third-party reporting of financial transactions in the economy, expanding use of taxes deducted at source to map economic activity, and opportunities given to assessees to report their income based on the transactions that are in the tax department's radar. The strong retail equity market participation by households is also seen to have contributed to the surge in ITR-2 filings.
'The steady rise in ITR-2 filings points to a significant shift in the income and investment profile of Indian taxpayers," said Sonu Iyer, partner and national leader, people advisory services, tax at EY India.
It reflects not only higher individual earnings but also deeper retail participation in capital markets and other investment avenues, said Iyer. 'Enhanced compliance monitoring and increased transparency of financial transactions have also contributed to this trend, enabling the tax department to widen the tax base and improve reporting discipline," explained Iyer.
Shifting landscape
The sharp rise in ITR-2 filings signals a significant transformation in India's tax landscape and is a strong indicator that more individuals are now actively participating in capital markets, as can be seen from the increase in the opening of new demat accounts, said Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm.
At the end of December 2024, India had 185 million demat accounts, 33% more than reported in the year-ago period, the Economic Survey 2024-25 had pointed out.
'It aligns with the trend seen post-pandemic, where retail investor participation in equities, mutual funds, and real estate has grown substantially. However, this trend is not just a reflection of increased participation in investment activities such as gains from stocks, mutual funds, property, and foreign assets but also, highlights the successful broadening of the tax base through enhanced compliance monitoring," said Maheshwari.
Tech-driven reporting
The income tax department's adoption of tech-driven automated reporting of transactions has played a pivotal role, Maheshwari said, referring to the tax authority's collection of information from third parties like banks, credit cards and property registrars and making it available to the tax payers in the form of Annual Information Statement (AIS) and Taxpayer Information Summary (TIS).
'These platforms now automatically capture and report a wide array of financial transactions including winnings from lotteries, virtual digital assets and online games. As a result, individuals who previously might not have disclosed such income are now required to file ITR-2, ensuring a more comprehensive reporting and tax compliance," said Maheshwari.
This evolution points to a maturing tax ecosystem where both increased financial sophistication among individuals and robust digital reporting mechanism by authorities are leading to more transparency and inclusivity to India's tax net, added Maheshwari.
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