Better to disregard the notification on tax return filing exemption

As expected, Central Board of Direct Taxes has issued a new notification last month to exempt salaried tax payers with income not exceeding Rs. 5,00,000 from filing income tax returns.  The notification stipulates various conditions (same as previous year’s) which are required to be satisfied to be eligible for the exemption.

One can read the conditions required to be satisfied in Bachhat previous year’s article here.  The article also list down the scenarios where the benefit shall not be available. 

Subsequent to Bachhat's article, CBDT also released FAQs on the last year’s notification.  Since the essence of current year’s notification remains the same, same FAQs can be applied to it.  Let us review few FAQs in this post to understand who shall stand benefited for the exemption.

Suppose Manish has a salary income of Rs. 6,20,000.  His interest income from savings bank account is Rs. 10,000 and as required by the notification, he has reported his interest income to the employer and tax has been deducted thereon.  Thus his Gross Total Income (as per tax parlance) is Rs. 6,30,000 for the year.  Now he is claiming deduction under Section 80C of Rs. 1,00,000 by investing in PPF, paying life insurance premium, etc.  Further he has invested Rs. 20,000 in tax saving infra bonds under Section 80CCF. He also claims deduction of Rs. 15,000 under Section 80D for health insurance premium paid on health policies.  In total, he has paid / invested Rs. 1,35,000 (Rs. 1,00,000 + Rs. 20,000 + Rs. 15,000) under various tax saving instruments.  Thus his Total Income (again as per tax parlance) is Rs. 4,95,000 (Rs.6,30,000 – Rs. 1,35,000) for the year.  Whether Manish is exempted from filing his tax return as per the notification?

Yes. One needs to consider the ‘total income’ of Rs. 4,95,000 and not the ‘gross total income’ of Rs. 6,20,000 to check whether he is qualified for exemption under the notification.  Thus in our example, Manish is qualified to take exemption and shall not be required to file income tax return for the year.

Let us add one more criteria to the above example.  Now suppose Manish has donated Rs.10,000 during the year and is eligible for the deduction under Section 80G. 

In this case, exemption available to Manish shall be withdrawn since as per the current guidelines, employers are not required to take cognizance of donations made while deducting TDS, unless the donation is to Prime Minister’s Relief Fund, Chief Minister’s Relief Fund or Lt. Governor’s Relief Fund.  Hence, Manish’s employer will not consider donation of Rs. 10,000 and shall deduct tax on the same and Manish shall be required to file return of income to claim refund of tax.

Similarly if one is claiming deduction of interest paid on housing loan, he is not qualified for the exemption even though after the deduction his ‘total income’ does not exceeds than Rs. 5,00,000.  The reason being the notification is applicable only if the individual has salary income and income from savings bank account.  Hence he shall be required to file the return even though the entire tax is deducted by the employer and no further tax is payable.

As Bachhat stated last year, it would have made more sense if the circular had exempted all tax payers with income not exceeding Rs. 5,00,000 provided all required taxes are paid (either by way of TDS, Advance Tax or Self-Assessment Tax) and PAN number has been quoted at the time of payment of these taxes.

Hopefully, better sense shall prevail during DTC and we shall see some amendment.  Till then, it is wise to disregard this notification.