Will the exemption from ITR filing proposal for senior citizen will work.

The budget presented on 1^st February 2021 has proposed exemption to senior citizen from filing of income tax return (ITR) subject to satisfaction of certain conditions. Let us understand what is the proposal and whether it will really work as intended.

Relief proposed for Senior citizen

Presently, based on the income criteria, every individual has to file his ITR if aggregate of his income from all the sources exceeds the basic exemption limit. For this purpose, the income to be considered is sum of all incomes before availing various deductions. Major of such deductions are those available under like Section 80 C for various investments and expenses, under Section 80 D for health insurance and under Section 80 TTA and 80 TTB for non-senior citizen and senior citizen respectively in respect of bank interest.

For the purpose of basic exemption individuals have been divided into three categories. For those who are below 60 years, the basic exemption limit is 2.50 lakhs. For those who have completed 60 years but have yet to complete 80 years it is Rs. 3 lakhs and for those who have already completed 80 years, it is 5 lakhs.

The budget has created another category of senior citizen i.e. those above 75 years of age for the purpose of granting exemption from filing of the ITR. The exemption will be available if their income comprises only of interest and pension. Moreover, the interest income of such senior citizen should only be derived from the same bank which disburses pension. The exemption from filing of ITR is not automatic. The senior citizen will have to furnish a declaration to the concerned bank along with details of various deductions available to the him, in respect of investments made and expenses incurred. The bank will then deduct the appropriate amount of tax after taking into account the deductions available and the rebate of tax available under Section 87A upto Rs. 12,500/- in case the taxable income does not exceed 5 lakh rupees

Will the scheme be successful?

So from the conditions prescribed it appears that the government has outsourced the job of ensuring that appropriate tax from senior citizen is collected to the banks.   It will unnecessarily increase the compliance burden of the banks.

All the tax payers who have income from pension and interest have to file only the simplest form ITR 1, which I think is almost like submitting the declaration and details to the banks. So instead of creating this new category, the government could have relaxed the condition of online fling of ITR by such category of tax payers and allowed them to file paper returns. In such a situation the burden of compliance would have remained the same for senior citizen.

As far as the number of tax payers which will get covered under this scheme is concerned, I do not think any significant numbers will be covered under the proposed scheme due to the conditions of composition of the income. As the bank fixed deposits do not offer attractive interest, the senior citizens are forced to invest part of their money in various schemes where the return offered are relatively higher like Senior Citizen Saving Scheme, Varishth Vay Vandana Yonaja, RBI floating rate saving bonds etc. In order to diversify their risk, the senior citizens who put all their money in bank fixed deposits, do not put the it only with one bank and that too with the bank disbursing their pension. The senior citizens also invest in equity shares, mutual funds and with companies as fixed deposits.

I am unable to understand why the government needed to create one more category of senior citizens in addition to two already existing.  I am also not able to understand the reason for fixing the 75 years of age for being eligible to claim this so called benefit. The government could have simply made the scheme applicable to all the senior citizen satisfying the prescribed conditions  instead of creating one more category of individual tax payers.

Instead of this provision, the government could have simply exempted all the senior citizens from the liability to file their ITR if their only source of income is interest and pension and they do not have any further tax liability after taking into account the amount of tax, if any, deducted on their pension and interest.

I feel the government is unnecessarily making the matter complicated by introducing such provisions which will not benefit any significant number of tax payers and instead increase compliance burden for banks.

The writer is a tax and investment expert and can be reached at [email protected]