Exemption from filing income tax return: How much beneficial to Salaried Tax Payers?

Central Board of Direct Taxes issued a notification last week to exempt salaried tax payers with income less than Rs. 5,00,000 from filing income tax returns.  The move is in line with finance minister’s announcement in this year’s budget.  Though the notification states that it is applicable for returns to be filed for the financial year 2010-11, it is expected that this exemption will continue to be available in future.  There could be a possibility that this exemption in modified formed is included in Direct Tax Code itself.

Who will benefit from this exemption?

Sadly, due to various caveats in the notification, not many will be benefit from this.  Basic conditions to be fulfilled to be eligible to claim exemption are:

1.   An individual has to be a salaried taxpayer.

2.   He should have income only from salary and interest income from savings bank account (interest income from fixed deposits is not included)

3.   The interest income should be informed to the employer beforehand so that employer can deduct tax at source on the same. This condition is a bit strange.  First of all, no one knows the exact amount of interest income before the end of the year.  The most one can provide is the approximate amount of interest.  Any difference will lead to refund or payment of tax, in which case the exemption is not available.  Further the circular has been issued in June 2011 and the tax department presumes all such employees would have informed their employers last year about such interest income so that necessary tax has been deducted at source.  In short, if the interest income is not forming part of Form 16, then this exemption is not available.

4.   Such interest income should not exceed Rs. 10,000 in a year.

5.   The total income of the tax payer after considering all deductions (such as under Sec 80C and other deductions) should not be more than Rs. 5,00,000.

6.   An individual should not have received salary income from more than one employer.  So all job hoppers are excluded.

7.   In case, the tax payer has any refund claims, then this exemption is not available.

8.   Tax payer should report their PAN number to the employer.  So that it can form part of FORM 16 issued by the employer.

Only if one satisfies all of the above conditions, he can claim exemption from filing income tax returns.

In which scenarios this benefit will not be available?

Needless to say, in case you do not satisfy any one of the above condition, the benefit is not available.  Besides some obvious cases where the exemption shall not be applicable, few other cases can be:

1.   If one has interest income from fixed deposits (Who does not have such income these days?)

2.   If one changes his job during the year.

3.   If one has sold any shares or mutual fund or debentures during the year.

4.   If one has brought forward losses of previous years which he wants to carry forward for future years (for example capital loss, etc).  Income Tax Act mandates to file return in such cases to ensure availability of these losses for future years.  The notification is silent on whether this benefit will be available, if return is not filed.  To be on a safer side, one should file the return.

Further there are certain cases where it is recommended to file the return with income tax authorities.  For eg:  One requires to submit income tax returns for availing loan from bank or for obtaining visa.   Proof of filing tax return is an important document and generally should be available for all years.

 

Thus though the intention of issuing this exemption is good, not many will be able to reap benefit from it.  It would have benefited larger section of people if the conditions for source of income and payment of taxes were not so stringent. 

Ideally, if income of an individual is less than Rs. 5,00,000 and all the taxes are paid to the Government (either by way of tax deducted at source or by way of advance tax or by way of self-assessment tax) and PAN number has been quoted at the time of payment of these taxes, then he should be exempted from filing the return.  This could have benefited many more tax payers from the rituals of filing tax return.

Are you one of those lucky few who will benefit from this exemption?  Do share your views and suggestions in the comment section below. Thanks

How your secured savings landscape is bound to changed?

• Interest rates on Public Provident Fund to be linked to the market yields on government securities of comparable maturity, 
• Annual reset of interest rates of NSC, PPF, etc and 
• Discontinuation of Kisan Vikas Patra instruments.    

These and many other recommendations shall become reality if the Government accepts the last week’s report of the committee headed by Smt. Shyamala Gopinath, Deputy Governor of Reserve Bank of India.  The committee was formed to recommend reforms required in overall administration of National Small Savings Fund (NSSF). 

Following are the small savings schemes covered under NSSF and on which the recommendations are made in the report:

Schemes / Rules	Implementing Agency
Post Office Savings Account	Post Offices
Post Office Time Deposit – 1, 2, 3 and 5 years	Post Offices
Post Office Recurring Deposit	Post Offices
Post Office Monthly Income Account (MIS)	Post Offices
Senior Citizen Savings Schemes (SCSS)	Post Offices and designated branches of public sector bank
Kisan Vikas Patra (KVP)	Post Offices
National Savings Certificate (VIII Issue) (NSC)	Post Offices
Public Provident Fund (PPF)	Post Offices and designated branches of public sector bank

 Source: Committee Report

The report acknowledges the importance of small saving schemes:

"Small Saving schemes have been always an important source of household savings in India. Although these instruments are technically not Government Securities and do not have any explicit Government guarantee, their legacy has given them characteristic of being equivalent to that of a Sovereign liability.  These schemes have been extremely popular amongst a large number of small investors in India who seek to invest in a secure instrument.  At the same time, these instruments have been treated as a means of providing social benefit to the small savers."

Hence the benefits these schemes provide to various sections of the population especially small savers are beyond doubt.  In this article, Bachhat list downs key recommendations made by the committee which directly impacts the investors.

Changes in interest rates:

One of the key recommendations of the committee relates to the interest rates.  The committee recommends that, other than for savings deposit, interest rates for all other instruments should be benchmarked against secondary market yields on Central government securities of comparable maturities and should be reset yearly.  It means that as the interest rates of government securities rises, the interest on these securities shall also increase and vice versa. 

The committee has; depending on the instrument, its liquidity and its tenure; also recommended a spread of minimum 25 basis points (bps) vis-à-vis government securities of comparable maturities. 100 bps is equal to 1 percentage point.  The spread is larger for NSC (50 bps) and Senior Citizen Savings Scheme (100 bps).  For eg: If a comparable security for PPF is trading at 8%, then the interest rate on PPF for the reference period shall be 8.25%.

Further, to avoid year-on-year volatility, cap of 100 bps has been recommended so that the rates are neither raised nor reduced by more than 1% from one year to the next, even if the benchmark rates fluctuate by higher margins.  These rates shall be fixed in advance and shall be known before the start of the financial year.

Committee recommends that interest rates on postal savings deposits should be in line with rates offered on bank’s savings account and be increased to 4% from current 3.5%.  Further, the interest should be calculated on a daily basis on such deposits.

Other Recommendations:

1.     Option of premature withdrawal of time and recurring deposits with provision to pay lower interest rate in such cases.

2.     Abolition of 5% maturity bonus on Monthly Income Scheme and reduction in tenure from 6 years to 5 years.

3.     Increase in annual investment limit for PPF to Rs. 1 lakh.  To discourage premature withdrawal, interest rates on advances against PPF deposits should be 2% higher than the prevailing PPF interest rate (as against 1% at present).

4.     NSC to be available with maturities of 5 years and 10 years (as against 6 years NSC at present) with interest rates linked to comparable G-sec rates.  No income tax exemption under Section 80C on accrued interest from NSC.

5.     The committee has also recommended reduction in commission paid to agents for the products sold.  The table below gives the existing and the proposed commission structure.  This and similar changes which happened in mutual fund industry earlier, will lead to emergence of fee based financial service industry wherein agents will start charging customers directly for the services provided by them.

Schemes	Existing Commission %	Proposed Commission %
Kisan Vikas Patra	1	0.5
Post Office MIS	1	0.5
Post Office Time Deposits	1	0.5
National Savings Certificates	1	0.5
Senior Citizen Savings Schemes	0.5	NIL
PPF	1	NIL
Post Office Recurring Deposits	4	Reduce 1% p.a. for 3 years. 1% thereafter.

Source: Committee Report

Effect on the current interest rates

Assuming that the Government accepts these proposals and implements the same with effect from 1^st July 2011, the revised administered interest rates based on above recommendations shall be as follows:

Administered Interest Rates for July 1, 2011 to March 31, 2012

Instrument	Current Rate (%)	Proposed Rate (%)
Savings Deposits	3.50	4.00
1 Year Time Deposits	6.25	6.80
2 Year Time Deposits	6.50	7.20
3 Year Time Deposits	7.25	7.50
5 Year Time Deposits	7.50	8.00
5 Year Recurring Deposits	7.50	8.00
5 Year SCSS	9.00	8.70
5 Year MIS	8.00 (6 yr MIS)	8.00
5 Year NSC	8.00 (6 yr NSC)	8.00
10 Year NSC	New instrument	8.40
PPF	8.00	8.20

Source: Committee Report

Bachhat’s take

Above recommendations, if implemented, will have long term impact on the way individuals save.  For eg: One will be required to consider the variation in interest rates, which hitherto were more or less constant, while planning for his retirement savings.  Reduction in agency commission will ensure that products are sold to investors on the basis of their merits.  Though these recommendations shall bring year-on -year variability in interest rates, provision of cap and floor of 100 bps shall limit the impact of such variability. 

Do you agree with the recommendations made in this report?  Do share your views and suggestions on this article in the comment section below.