Tuesday, June 28, 2011

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

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