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A Huge Breather

It has been confirmed that salary earners with up to Rs 5 lakh of income won't have to file returns…

The government has finally confirmed that salary earners with up to Rs five lakh of income do not have to file income tax returns. With this, a huge inconvenience has been lifted from the heads a large proportion of salary earners. I guess it will also put a serious dent into the business of the large returns filing industry that has sprung up in the last few years but I guess they’ll just have to lump it.

It’s interesting to see that government has chosen Rs 5 lakh as the limit and has also chosen to keep only salary and interest income as part of this exemption. According to news reports, this has been done because this information already exists with the government in some form or the other and is therefore just duplication. However, it does seem that salaried employees will have to inform their employees about their interest income and it will be incorporated into their form 16.

It is unfortunate that capital gains have not been included in this system. As long as capital gains come from sources like equity or fund investments they are pretty well documented and difficult to hide (unlike, say, gains from property). And as long as gains from equity or equity fund investments are the result of an investment that has lasted for more than an year, there are no tax liabilities anyway. If the investor’s total income is less than the same limit of Rs 5 lakh, it shouldn’t matter if some of it is from investing in equities or an equity mutual fund.

In fact, an entry-level investor could consider this a serious impediment to putting in a bit in an equity SIP. If you are told that you won’t need to file a return when you withdraw savings that are in a debt instrument but will need to do so with equity instruments, wouldn’t that modify the choice you make? For long-term investments, equity-backed investments provide the best defense against inflation and it would be unfortunate if the country’s tax laws would disincentivise that.