Income tax return filings plateau as small earners exit net

With effect from FY26, the basic exemption limit has been raised further to ₹4 lakh, a shift likely to reflect in returns filed in 2026-27, due date for which will be the end of July, without a late fee.

Individuals below the exemption threshold are generally not required to file returns unless they meet specific conditions such as high electricity consumption, foreign travel spending or ownership of foreign assets. Those above the threshold must still file returns even if rebates reduce their final tax liability to zero.

Return filings also depend on factors such as tax exemption thresholds, participation and exit from the workforce, changes in income, and death.

As per the thumb rule followed by officials, about 80% of tax revenue comes from about 20% of taxpayers.

The decline has also altered the composition of India’s tax retrun filing base. For six years through 2024-25, taxpayers with income up to ₹5 lakh formed the largest filing category. In 2025-26, however, those earning between ₹5 lakh and ₹10 lakh became the biggest segment, according to the data.

Individuals reporting income more than ₹5 lakh jumped from 23.4 million in 2023-24 to 47.5 million in 2024-25 and to 54.5 million in 2025-26, the data showed.

Neeraj Agarwala, senior partner at Nangia & Co. LLP, said the numbers suggest a shift in the composition of return filers from the below ₹5 lakh income bracket to higher income brackets.

The number of individual taxpayers filing returns above ₹5 lakh has increased, while total return filings comprising all tax return forms have moderated between FY2023–24 and FY2024–25, he said.

“One possible explanation is that individuals below the basic exemption threshold, particularly those without excess TDS or refund claims, may no longer see a need to file returns. Additionally, automated tax scrutiny and stricter compliances may be pushing taxpayers into higher income slabs,” said Agarwala.

Sharma said fewer filings at the bottom end do not necessarily imply fewer taxpayers.

“The government has, by design, brought lower-income earners out of the compliance net. Notably, this policy shift explains why overall return filings in 2025-26 stabilized at 9.19 crore, a marginal 0.04% increase from the previous year. Meanwhile, filings in the ₹5-20 lakh segments continue to record steady growth, driving the incremental numbers,” added Sharma.

The composition of India’s tax base is shifting toward higher-income groups, driven partly by policy-led relief for lower-income earners and partly by rising formalization and income progression among salaried taxpayers, Sharma said. "This reflects a transition in the taxpayer base rather than a weakening in tax compliance,” said Sharma.

The share of individual tax returns showing income up to ₹5 lakh in overall tax return filings fell sharply from 67% in 2023-24 to 42% in 2024-25 and further to 32% in 2025-26.

The drop in filings from this category contributed to an overall plateau in tax return filings in FY26 at 91.92 million compared with 91.89 million a year earlier, after average annual growth of about 8% over the previous three years.

Personal income-tax collections, however, continued to rise, increasing more than 18% to ₹12.35 trillion in FY25 and another 6.2% to ₹13.12 trillion in FY26.

To be sure, the data by itself is insufficient to definitively conclude whether the trend reflects a genuine shift in the tax base or merely a change in taxpayer behaviour and reporting patterns, added Agarwala of Nangia & Co. LLP.

The extent of income reported under different tax return forms and classes of taxpayers is not readily available.