The 5 Lakh Income Tax Filing Exemption Limit Details

by Manshu on June 24, 2011

in Tax

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.

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{ 34 comments… read them below or add one }

Vishal Ramaswamy June 24, 2011 at 8:42 am

Dividend income from MF’s is Tax free as Tax is Already Deducted at Source. My suggestion is to always invest in Dividend schemes, as it sets up a regular stream of income even when you dont want to book profits. Also since the NAV needs to be adjusted downwards, you get to accumulate more units at current market levels.

For Eg: HDFC TOP 200 Nifty 6338- NAV- 55.7- 1st week of Nov. (Not exact dates of fig- approx).
Dividend of Rs. 4 declared on 10th Mar, 2011. NAV adjusted from 48-43
Nifty- 5177 NAV- 42.78.

So as compared to growth having NAV of 200, you get more units. In all probability one would miss the opportunity to book the profit at NIFTY 6338. But the dividend income gives you the return and also the lower NAV to re-invest it, making it into a growth fund but with more units at lower levels.

All it takes is patience for the dividend and disciplined re-investment once the NAV has been adjusted.

The dividend re-investment option, however re-invests on the same day NAV and hence not adjusted, reducing the averaging advantage provided by dividend schemes.

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Manshu June 28, 2011 at 8:15 pm

You may get more units but those will be at a lower rate :) I’m afraid I fail to see the rationale in what you’re saying.

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Vishal Ramaswamy June 28, 2011 at 8:24 pm

The only reason for investing in growth funds is to ensure that you save greater amounts over a longer period of time. Now you might look at 100 units over a period of 3 years in a growth fund with a return of 30% or you can look at 200 units over the same duration in a dividend option with 15% return having declared at least one dividend over the said period or equivalent to the amount of Rs. 4. So you get fresh capital from the market without having booked the profit, at an inter-mediate stage in the cycle. Yes overall when you look at any fund it will always appear that in absolute terms the growth fund offers the best returns, however the period for which your money remains locked as it is yet to get into the positive is where dividend income comes in handy. I have invested for a client of mine in Sundaram Tax Saver starting from Feb’09 till date, total investment of 4L. Please compare the dividend option and the growth option. Even before the end of the Lock- in period of 3 years, he has received back income to the tune of 1.16L before April 11. So in short he has invested the fourth installment directly from this dividend income. This is my rationale. :D

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Manshu June 28, 2011 at 8:37 pm

Thanks for your reply Vishal – to me ensuring “greater amounts over a longer period of time” is THE thing, not just a small factor :-)

I guess investing in Dividend funds makes sense for people who need money from the market periodically, but for people who have no use of that money, I fail to see how they benefit.

They may get money in the form of dividend, but if that money goes back into buying more units, how is that different from just letting it grow :)

Anyway, I’m sure being close to your clients puts you in a position to understand what they want and take specific actions suited to their needs. All the best to you and your clients!

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Subodh June 24, 2011 at 10:14 am

Thanks Manshu for all this information. I didnt know some of these points.

I agree with Vishal as he says that dividend income is tax-free (for equity oriented MFs).
However, one cannot expect a regular income from dividend. There is no set schedule for the payment of dividend and also how much dividend will be paid is not predictable. If a person needs cash flow, he cannot be dependent on the unpredictability.
Practically there is no difference in returns from growth option Vs dividend re-investment option (assuming long term). while in payout case, ppl like me usually forget to invest back :D
Having said that, one should not go for dividend payout option, unless its an ELSS (coz in ELSS, reinvested dividend is again locked for next 3 years).

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Subodh June 24, 2011 at 2:53 pm

Once DTC comes into effect, dividend will be taxed at 5%, even for the reinvestment option ie even if the dividend is not paid out to investors! growth option would be best in my opinion.

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Manshu June 28, 2011 at 8:15 pm

Thanks Subodh – the ELSS dividend re-investment point is a good one.

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Harsh June 24, 2011 at 12:36 pm

How about income less than 5L and you have home loan? ITR – 2 form!!
Need to file return??

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Manshu June 28, 2011 at 8:14 pm

As far as I know, you will have to file returns Harsh.

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Himanshu Bansal June 24, 2011 at 7:53 pm

Thank you Manshu. I was not familiar with this rule so it is surely a good starting point for me.

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Manshu June 28, 2011 at 8:15 pm

Great Himanshu – glad it was useful!

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Paresh June 27, 2011 at 3:10 pm

To get exemption from tncome tax return,,it is mandatory that one should have provided the interest received from saving bank account to its employer.It’s may be the matter of research that how many might have done that in last financial year…

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Manshu June 28, 2011 at 7:53 pm

That’s a good point Paresh – this might happen going forward, but not many have done it already.

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Sandip July 4, 2011 at 3:48 pm

Per ET (Refer – http://economictimes.indiatimes.com/quickiearticleshow/9091034.cms)
No one will be able to avail this benefit.

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bemoneyaware July 4, 2011 at 5:16 pm

Today’s article in ET Wealth about :Income up to Rs 5 lakh: Exemption from filing I-T returns? No one can avail of it!
http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/ET-Weath-Income-up-to-Rs-5-lakh-Exemption-from-filing-I-T-returs-No-one-can-avail-of-it/articleshow/9074892.

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Manshu July 10, 2011 at 12:10 am

Thanks for the link. I couldn’t go through the whole article because of the super annoying way in which they make you click link after link :-) In any case, this is a good step forward, and in the years to come will become more practical as the chinks are ironed out.

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nidhish July 5, 2011 at 6:58 pm

Hi Manshu,
If a NRI has income less than 5 lakhs from his/her Indian income e.g. rent of the house in India, Interest of the NRO account, Do he/she would be also exempted from filling tax returns in India ?
thanks in advance
Nidhish

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Manshu July 10, 2011 at 12:01 am

Hi Nidhish,

I’m afraid I don’t know the answer to that question.

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Praveen K July 6, 2011 at 11:12 am

My mom is 59, widowed and her income which is all from FD interest. Her income from these sources has been less than 1.8lakhs. For FY 2011-12 she may get mor than 2 lakhs. Does she ave to file returns for years she received less than 1.8 lakhs (past) or greater than 2 lakhs (future)?

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Manshu July 10, 2011 at 12:00 am

Yes Praveen, since the source of income is from fixed deposits, she’ll have to file returns if the interest crosses the slab.

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madhur goyal July 9, 2011 at 11:21 am

Is this applicable to a senior citizen widow lady who has an interest income of approx 5 lakhs from banks(different banks) out of her FD’s . Does she also need to file ITR or is she exempted as per this policy.
Please guide.

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Manshu July 9, 2011 at 11:19 pm

Madhur,

Since the current provision is only applicable to people who have incomes from a savings account, this will not be applicable in the case you mention above.

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rahul July 26, 2011 at 11:12 pm

1 year back i help a friend to setup his business by giving 1,25,000 rupees and now yesterday he gave me a plot of Rs. 2,80,000 rupees + 3 years back i purchased 2 plots for rupees 30k+30k which now about 1,00,000 + 1,00,000 total 2,00,000 rupees.

so I Have 5,00,000 rupees total and i want to do fixed deposit in sbi bank.so,please tell me when i deposit 5,00,000 in sbi bank fixed deposit will income tax department makes trouble and please tell me solution and till now i not paid any tax because from 3 years iam earning only 1,00,000 per year by doing small job in cloth showroom and i too have pan card.PLEASE,your suggestion can make my life.

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Manshu July 27, 2011 at 6:41 pm

Rahul – I am afraid I don’t know what will happen in this situation – your best bet is to consult a practicing CA.

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siva November 7, 2011 at 2:31 pm

Now i’m getting above five lacs(5.3), what are the things to do by me to reduce task. Please help me.

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siva November 7, 2011 at 2:32 pm

sorryfor the above post :) task ==> tax

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Manshu November 8, 2011 at 5:09 am

You can invest in one of the instruments listed in this post and that will help you in saving tax.

http://www.onemint.com/2011/10/17/section-80c-tax-saving-instruments-infographic/

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Gopal Bhatnagar November 11, 2011 at 4:16 am

Pls let me know the maximum amount are to be deducted as lic premium,bankintrest,investment for more then 5 years etc for salery persons
for the year 2011-12 with section wise

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ram December 27, 2011 at 9:14 pm

i get gross salary of 5.37 lac from my company.so how much tax i will have to pay for that if i have not invested anywhere and if i invest 5oooo in lic then how much tax i will have to pay? i get HRA of 76000 from my company and the salary of 5.37 lac is including this HRA.So wiil it be considered and deducted from the gross salary of 5.37 Lac to find the taxable amount. i will have to pay tax on (5.7 Lac-50k) or the whole 5.37 lac. Please expalin in details as it will help no. of ppl.

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bemoneyaware December 28, 2011 at 4:32 am

Ram,
Sometime back I had done the post on Salary, Net Salary, Gross Salary, Cost to Company: What is the difference with some example, which might help you.

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Manshu December 29, 2011 at 12:09 am

I’m afraid I don’t have the bandwidth to calculate tax for individuals. You need to hire a CA – that’s what I would have done in this situation.

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bemoneyaware December 29, 2011 at 8:40 am

Welcome to the real world Ram. We don’t allow people to drive without a license test but let them enter complex financial world without much financial education Would you play a game without knowing the rules? No I assume so.
You have done a good start by joining forum such as onemint.com But as they say “there are miles to go..”
Your question has many parts:
1) Understanding Gross Salary, HRA Calculation, taxable salary
2) Investment: pertaining to LIC
3) Tax : Do you have PF? Does it cover 1 lakh limit of 80CC or you can invest in 80 CC.

It is difficult to answer any part without understanding the complete picture such as for HRA where do you stay – a metro?
Investment : why in LIC? Which scheme ? Why not ELSS or MF? It depends on your age and your financial position-any debt(education loan, credit card debt)
I hope you get the picture, one solution will not fit everyone.
As Manshu suggested to get a clear picture it is better you consult a Chartered accountant. If you consult now you can also save tax if you have not used the 1 lakh 80 CC limit. At times we should not be penny wise and pound foolish.

Don’t leave everything on CA , you can also contact a financial adviser to set you on a financial journey. But as it would be your hard earned money you should continue learning about finances (we all are learning )and onemint.com is a great forum. Some links from onemint,com:

Introduction to Income Tax
Section 80C Tax Saving Schemes
The trouble with personal recommendations
If you want to know about personal finance links and books you can refer to my blog post Personal Finance Books For Adults And Young Adults

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Rushikesh Sonar January 13, 2013 at 1:33 pm

My total income for 2013-2013 is Rs.2.64 lacs, without considering any deductions. I wanted to know whether I need to pay any tax? If yes then how much? As I pay a LIC premium of Rs.12000 per annum.

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AMIT July 28, 2014 at 11:30 pm

my taxable income after all deductions isRs. 500160 and interest earned on sb account is less than 10000. can I claim for exemption or have to pay tax cause of Rs 160 extra earned.
Pls advise.
Thanks in advance.

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