Monday, July 11, 2011

Bad News for Salaried Employees of India

Well, I am among the millions of Indians who are unhappy because of this news but nonetheless, we dont have a choice and the only thing we can do is, try to mould the situation in a way that we get the most out of it.

What is this about?

Remember the post a few weeks back that was titled Good News for Salaried Employees of India??

I had explained that the Income Tax department of India has made some changes to the Tax Return Filing policy which will be a good news for all of us. Unfortunately, I have to Apologize for talking too soon about it.

After a few weeks, we are starting to get more clarity on this development and now it looks like this Good News isnt so good after all...

What is the Problem here?

The Central Board of Direct Taxes (CBDT) had made millions of Indians smile by announcing that salaried taxpayers with an annual income of up to Rs 5 lakh need not file their returns. (Refer to my article mentioned in the previous paragraph) They won't have to spend time, effort and money in filing their tax returns.

The problem here is that, given all the conditions that govern if someone needs to file his/her returns or not, it looks unlikely that it would be of any real use to us. At the end of the day, if the conditions are going to ensure that everybody does file their returns like usual, whats the point of having this new ruling?

According to the Ruling by the CBDT, a salaried person is exempt from filing his return for the financial year 2010-11 if he fulfils the following conditions:
a) Income after allowable deductions is up to Rs 5 lakh.
b) Income is only from salary and savings bank interest
c) Salary is from one employer.
d) Savings bank interest is below 10,000.
e) Tax on bank interest is paid and included in Form 16

Let us analyze these points one by one.

a. Income after allowable deductions is up to Rs 5 lakh.

Fine - Fair Enough. Many of us will fall under this bucket.

b. Income is only from salary and savings bank interest

Problem - Anyone who is earning around 5 lakhs a year may have Bank Fixed Deposits, Share Market Investments, Mutual Fund Dividends, Rental Income etc. So, anyone who earns an income out of any of the two means (Salary & Savings Bank Interest) cant use this.

Even Investments made under section 80C like NSC, PPF or infrastructure bonds to claim deduction under Sec 80CCF are not considered. So, if you have done something to save tax in the past and earned an income out of it, you cannot use this.

Result - Atleast 65% of people are now out of the bucket.

c. Salary is from one employer only.

Problem - Anyone who switched jobs cant take advantage of this rule. Even if your income is below 5 lakhs, if you switched jobs, you cant use this.

Result - Another 10 - 15% of us are out of the bucket.

d. Savings bank interest is below 10,000.

Problem - Lets assume that I dont invest in any investment option like stocks or mutual funds or bank FDs and keep all my cash in my savings account. At the end of the year, I may earn an interest of more than Rs. 10,000/- and it is a very real possibility. Unless you are someone who spends every single rupee you earn, you cant use this.

Result - Another 10 - 15% of us are out of the bucket.

e. Tax on bank interest is paid and included in Form 16

Problem - Your employer will give a form 16 only for the salary he pays you. Why would he bother about clubbing your bank interest earned? Some employers ask for other income earned before they print out the form 16s for you. If you are that lucky bunch, you may get an interest paid certificate from your bank and give it to your company. Otherwise, you cant use this.

Result - Another 10 - 15% of us are out of the bucket.

Let us do the Math:

Out because of condition b - atleast 65%
Out because of condition c - atleast 10%
Out because of condition d - atleast 10%
Out because of condition e - atleast 10%

Summing Up - 95%

So, this essentially means that 95% of the salaried population that may fall under the 5 lakhs slab will not be able to use this new ruling and will eventually have to file their tax returns.

A point to note here is that - even this 5% seems to be a big number. Am not really sure if someone would fall under all these categories and still manage to not file their tax returns. The more realistic number would be around 1% of the population or even less.

Let's assume that there is indeed somebody (A hypothetical Situtation) who has no such investments and, therefore, no income other than from his salary and the interest on the bank account. Even then, he may not be able to fulfil the conditions for exemption. The notification says that the tax due on the interest income should have been paid and the income and the tax should be mentioned in Form 16 from the employer. The interest on bank account is credited on a half-yearly basis. The interest from October to March gets credited after March 31. You need to be a financial expert to correctly estimate the tax due on this income and pay the right amount. Considering the fact that banks pay interest on your daily end-of-day bank balance, the calculation part for even 3 months is going to be hectic and you can easily rule out the 6 months part. Without a tool that calculates your interest based on daily balances (and this is if you know your daily end of day balance) you cant really predict your bank interest income.

What is the final Verdict?

Given all the complicated conditions and the paperwork required to avail of the exemption and the possible repercussions of not filing your return, it looks like spending the 30-40 minutes online to file your tax returns is a far simpler option.

It will save you a lot and I mean a lot of time and effort and it is extremely easier than breaking your head about all these conditions...

Happy Filing your Tax Returns.

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