ITR Filing and Net Worth – Myths and Confusions

ITR Filing and Net Worth – Myths and Confusions

Posted by CA Pankaj Kumar Vats
On 14 Mar 2023

There is one big confusion among a lot of persons that ITR filing is equals to the Net Worth

But in simple words, it can be easily explained that Filing of Income Tax Return does not increases the Net Worth

The Net worth is increases by the amount of investment that have been made by an Individual

Let us understand it with the help of One Example
Mr. A Files the Income Tax Returns for 5 Years as follows

Year 1: 5,00,000/-
Year 2: 6,00,000/-
Year 3: 7,00,000/-
Year 4: 8,00,000/-
Year 5: 9,00,000/-

So the Total Income declared in five years is Rs. 35,00,000/-

Now here, it should be understood that the Net Worth is not Rs. 35,00,000/- but something different

For arriving at the figure of Net Worth, the following also have to be considered

Out of the Income offered for taxation, there must be paid some taxes, and there must be made some expenses. And thus the amount left after deducting the taxes and expenses, we can come to the amount, which can help us building the Net Worth
So let us add few points in the above example,
Taxes Paid and Expenses
Year 1: 1,50,000/-
Year 2: 2,00,000/-
Year 3: 2,50,000/-
Year 4: 3,00,000/-
Year 5: 3,50,000/-

Total Taxes and Expenses: 12,50,000/-

Thus The Total Net Worth could be 35,00,00 (-) 12,50,000: Rs. 22,50,000/

Further in actual, the Net Worth should be more than 22,50,000/- provided it is invested well.

To have a simple understanding of this, the following table may be referred

Conclusion: It should be understood that the it is not the amount of Income, which determines the Net Worth, but it is the amount of Savings and Investments, which determines the Net Worth.

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