The 5 Lakh Income Tax Filing Exemption Limit Details

I discovered something about the new rule that exempts people earning less than Rs. 5 lakhs from filing income tax returns that I hadn’t noticed before, and I thought I’d do a post on it.

I didn’t know that you lost the income tax filing exemption if you had more than one job in a year, even if you met the other criteria.

This tax filing exemption news is a few days old, so I know that I missed this aspect earlier, but I thought it was best to be late than never, and at least have one post on this topic here, since I expect some people to have questions about this rule.

Income tax filing exemption applicable to taxable income of less than Rs. 5 lacs

You have to consider the taxable income, and not your gross salary. So, if you make Rs 5.5 lacs, but invest Rs. 1 lac in Section 80C instruments then your taxable salary is just Rs. 4.5 lacs, and that makes you exempt from filing income tax returns under the new rule.

You should have income from only your employer and a savings bank account

You can earn interest by way of a savings account and as long as that is less than Rs. 10,000 (and you’re below the Rs. 5 lakh limit) you are exempt from filing income tax.

This income tax filing exemption rule is already applicable

The rule is applicable for the salary you earned in the financial year April 2010 – March 2011, so this rule is already applicable.

Should people with less than Rs. 5 lakhs buy growth instead of dividend mutual funds?

You know that ELSS mutual funds will lose their tax benefits when DTC (Direct Tax Code) kicks in, so a lot of people are interested in taking advantage of ELSS funds this year.

However, with this rule kicking in should you invest in growth instead of dividend mutual funds?

It seems to me that you will only need to file income tax returns if you had dividend income or capital gains income, but if you just bought a growth mutual fund which you don’t sell then you will neither have a dividend income nor any capital gains, and thus the tax filing exemption will still be applicable to you.

I’m not entirely certain I understand this correctly, but it is something worth exploring if you were in this situation.

What about exempt long term capital gains?

You know that long term capital gains in equity mutual funds and shares are exempt from tax. However, if you had such income then it will come under Income from Capital Gains in your total income, and that will take away the tax filing exemption from you.

So, you will have to file an income tax return due to income which is not taxable?!

I don’t know if I understand this correctly, but another thing worth exploring if you are in the situation.

Conclusion

This a good step, and will probably expand to capital gains and interest from dematerialized bonds in the future as well, but until that time you have to keep these factors in mind before deciding if you do or don’t need to file taxes this year.

Disclaimer: I’m not a tax expert, and hire someone else to do my own taxes, so you should use this information only as a starting point to your research.

Update 1: Reader Namit emailed me letting me know that I have written that fixed deposits are included under the exemption, but that’s not the case. You are exempt only if you earn interest from a savings bank account, and not a fixed deposit.

Here is an article from Business Standard that confirms what Namit says. Following is the relevant excerpt:

But those with income from other sources such as fixed deposits and mutual funds will have to file returns.

I have corrected the post, and apologize for the error.