Exemption from filing returns

Fulfilling a Budget vow to exempt a certain class of tax-payers from the annual ritual of filing an income-tax return, the Central Board of Direct Taxes (CBDT) has issued Press Release No. 402/92/2006-MC (14 of 2011) on June 23, 2011. Individuals with total income up to Rs 5,00,000 for the financial year 2010-11, after allowable deductions, consisting of salary from a single employer and interest income from deposits in a savings bank account up to Rs 10,000 are not required to file their income-tax return. It appears that the criteria have to be read separately and not together — it is not mandatory to have income from deposits in a savings bank account to avail of the benefit.

However, if one earns income from such deposits, it cannot exceed Rs 10,000 per annum. Changes in employment result in distortions in the tax deducted at source and, hence, the embargo on such persons from not filing a return. Exempt individuals must report their Permanent Account Number (PAN) and the entire income from bank interest to their employer, pay the entire tax by way of deduction of tax at source, and obtain a certificate of tax deduction in Form No.16. The Press Release states that persons receiving salary from more than one employer, having income from sources other than salary and interest income from a savings bank account (in excess of Rs 10,000, though this has not been specifically mentioned) or having refund claims shall not be covered under the scheme. In case the tax department has issued notices under Sections 142(1), 148, 153A or 153C, filing of tax returns has been mandated.

Qualifying for exemption

After the abolition of standard deduction from the Assessment Year 2006-07 onwards, House Rent Allowance (HRA) takes the top slot in the quantum of deductions from salary. Invariably, the restriction of rent paid over 10 per cent of salary is the deduction available. The deductions for profession tax, medical reimbursements, conveyance allowance and other permissible deductions are miniscule and would not make a material difference except in some border-line cases. Back-of-the-envelope calculations show that a person earning a gross salary of Rs 87,550 per month from a single employer need not file his returns if he avails the maximum HRA permitted.

Other assumptions would be that there is no income from other sources and that he has not parked all his savings into a savings bank account that earns him in excess of Rs 10,000 per annum in interest. In reality, however, a person in this income range would be in the middle of a housing loan. Whether self-occupied or let out, the net effect would be reflected in Income from House property which disqualifies him from availing the exemption provided by the Press Release, as this is an income other than salary. Basic eligibility to avail of a home loan for some banks are a gross income in excess of Rs 5 lakhs. This could force several tax-payers to file their returns, as a house property is very dear to the Indian psyche and the borrowal extends for close to one-and-a-half decades making monthly instalments comfortable. This can probably be the biggest let-down in the exemption. Many employers reckon the limit of Rs 150,000 provided for interest on home loans in their tax deductions. If the exemption is extended to self-occupied property, where the interest exemption is disclosed to the employer, it would cover a much larger population.

Direct taxes code

The Press Release would warrant an amendment to Clause 144 of the DTC which starts off with an unequivocal “Every person shall furnish a return of tax bases on or before the due date to the Assessing Officer or such other authority or agency as may be prescribed”. DTC permits deduction for house rent allowance but has not prescribed the limits as Section 10(13A) and Rule 2A do at present. The use of the words to such extent as may be prescribed in Clause 23(1)(h) of the DTC confirms the fact that there would be prescriptions that would restrict the allowance.

An income-tax acknowledged return is one of the basic documents needed for a loan of any sort. Loan-seekers may not choose the option of not filing their return if the lending bank insists on a return. Choosers of the option would save a lot of administrative monotonies to themselves and the department. This relaxation would have a true impact if the exemption limits are reviewed regularly and the documents submitted to the employer are considered to be proof of income.

(The author is a Bangalore-based chartered accountant.)

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