Just over 5.9 Crore ITRs filed for AY26-27: How much of our economy is informal?

Just over 5.9 Crore ITRs filed for AY26-27: How much of our economy is informal?

Thank you, taxpayers! 🙏🇮🇳 Over 5.9 Crore ITRs filed for AY 2026–27 by July 31st!

This is the facebook post made by IT department of India. When I read this post, the first thing that popped in my head is this question – how much of our economy is informal? then to correct myself if I am wrong I asked myself another question – is this a good proxy to gauge the size of the formal economy in India or how many people work in formal economy?

Anyway, if you have not asked these questions yourself, at least, you would have asked one question for sure – Why is the number so low? and is it bad? or is it really as bad as it looks?

Let’s explore these questions one by one.

Is this a good proxy to gauge the size of the formal economy?

Gemini’s answer:
The short answer is no — total Income Tax Return (ITR) filings are not an accurate proxy for either the size of India’s formal economy or the total number of formal workers.

While the milestone of over 5.9 crore ITRs filed by July 31 reflects rising tax compliance, digital tracking, and broader financial inclusion (Sarkaritel), using ITR counts as a direct measure creates massive misalignments in both directions.

Why ITR Statistics Distort Formal Economy Estimates

• Formal Workers Excluded:
• Low-Income Formal Earners: Millions of formal or semi-formal workers earn below the basic tax exemption threshold (e.g., ₹3 lakh per year under the New Tax Regime or ₹7 lakh net taxable limit after rebates) and are not legally mandated to file an ITR.

• Agricultural Income Exemption: Agriculture is exempt from central income tax under Section 10(1) of the Income Tax Act. Large formal agribusinesses, commercial farm operators, and high-earning individual farmers fall outside standard ITR metrics.

• Non-Workers Included:

• Filing for Financial Access: A significant chunk of individual filers have zero tax liability and file returns solely to claim Tax Deducted at Source (TDS) refunds, establish income proof for home/car loans, or support visa applications.

• Non-Individual Entities: Aggregate ITR numbers count corporate entities, partnership firms, Association of Persons (AOPs), and Hindu Undivided Families (HUFs)—not just active individual workers.

• Informal Sector Overlap:

• Presumptive Taxation Filers: Small traders, micro-entrepreneurs, and gig workers who operate largely in the informal or cash economy often file returns under presumptive taxation schemes (ITR-4 / Sugam) simply to maintain banking channels or comply with digital payments tracking.

Better Alternative Proxies

To measure formal employment and formal economic activity accurately, economists rely on multi-source administrative and survey data:

Summary

Instead of measuring the absolute size of the formal workforce, high ITR numbers measure compliance velocity, data integration (via tools like the Annual Information Statement and TDS expansion), and the rate at which informal activity is being brought into the formal financial fold.

Why is the number so low?

The primary reason the ITR number (~5.9 crore) seems low relative to India’s total population (~1.4 billion) is that India’s structural labor landscape is overwhelmingly informal and low-income, meaning most workers fall entirely outside the legal or tax system.

The Structural Drivers Behind the Low Numbers

• Dominance of the Informal Sector:
• According to International Labour Organization (ILO) data and the Periodic Labour Force Survey (PLFS), roughly 85% to 90% of India’s total workforce (~500–550 million people) works in the informal economy.

• These include micro-entrepreneurs, small shopkeepers, agricultural laborers, construction workers, domestic helpers, and street vendors who operate purely in cash or unrecorded channels and earn below taxable thresholds.

• Basic Income Thresholds & Exemptions:

• Under the New Tax Regime, individuals earning up to ₹7 lakh per year generally pay zero income tax due to rebates.

• Since the median monthly income in India for salaried/regular workers remains modest (averaging ~₹15,000–₹22,000/month depending on region), the vast majority of working Indians do not earn enough to be legally mandated to file a return.

• The Agriculture Exclusion:

• Agriculture accounts for roughly 40%–43% of India’s total employment.

• Under Section 10(1) of the Income Tax Act, agricultural income is completely exempt from central income tax. As a result, hundreds of millions of people working in farming and allied activities are not part of the ITR system, regardless of whether their farms operate at a commercial scale.

• Demographics and Dependency Ratios:

• Out of a total population of 1.4 billion, only about 550–600 million people constitute the actual labor force (the rest being children, students, homemakers, or elderly dependents).
• When evaluated against the total workforce rather than the total population, 5.9 crore ITRs represent ~10% of working-age adults—a ratio that directly mirrors India’s actual proportion of formal wage earners.

Does it say anything about the formal or informal economy?

Yes, absolutely. While ITR filings cannot give you an exact, direct head-count of informal workers, the metric serves as a powerful inverse baseline and a measure of formalisation velocity.

When viewed alongside macro-economic data, the low proportion of tax filings reveals several key structural truths about the informal economy:

1. The “Floor” of the Informal Economy (Inverse Measurement)

• If ~6 crore individuals/entities file returns out of a total labor force of roughly 550–600 million, it mathematically confirms that at least 80% to 85% of India’s working population operates outside the formal direct-tax umbrella.
• It places a firm upper bound on how large the formal wage-earning workforce can possibly be at any given time.

2. The Size of the “Low-Income / Micro” Informal Segment

• The main reason millions of unorganized workers (gig workers, street vendors, small-holder farmers, construction laborers) do not file ITRs is not active tax evasion, but income scale.
• The low ITR count illustrates that the informal economy is overwhelmingly composed of micro-incomes falling below the basic tax exemption threshold (₹3 lakh to ₹7 lakh net). It highlights that India’s informal sector is primarily a survival and self-employment economy, rather than a hidden layer of high-earning shadow businesses.

3. Measuring the Pace of Formalisation Over Time

• While the static snapshot of 5.9 crore returns shows a large informal sector, the rate of growth in filings tracks how fast the informal economy is shrinking or shifting into formal channels.
• Measures like GST integration, digital payments (UPI), and the Annual Information Statement (AIS) capture cash-based informal transactions and convert them into trackable financial footprints. When a small trader moves from unregistered cash sales to filing an ITR-4 (Presumptive Tax), it records a direct migration from the informal to the formal realm.

Summary

Instead of reading the low ITR figure as an accurate headcount of formal workers, economists use it as negative space: it highlights the vast scale of low-income, unorganized work, and the steady rate at which informal activity is being integrated into the visible financial grid.