Anarchy in tax calculations: Exemptions, deductions, rebates and reliefs

QUESTION: At present interest income is exempt up to Rs. 12,000 under Sec. 80L of the Income-tax Act. Interest on PPF A/c (Pubic Provident Fund) is not taken into account, while reckoning income tax, as the interest is totally exempted.

Similarly interest on deposits made by retiring public sector/government employees (under RGES) from their terminal benefits are fully exempt from income tax.

As the rate of rebate under Sec. 88 is linked to the gross total income, is the interest on RGES deposit to be reckoned for limit for the rate of rebate under Sec. 88 which may be 15 per cent (instead of 20 per cent) if it is not reckoned at all. These and other doubts as to the manner of calculation of tax may be indicated.

ANSWER: The income which is exempt like interest from PPF in Chapter III is not income at all, so that it is not required to be reported. Return also does not require any information regarding exempt income. But it may be advisable to show such exempt income by way of a note, so that the availability of such exempt income becomes part of the record and would help to explain any investment made out of them in a later year.

Since frequent queries are often raised regarding exemptions, deductions, tax calculations, surcharges and interest, the main features are briefly adverted to. The Income-tax law makes a distinction between what is totally exempt and what is deductible. Again, what is deductible may also be subject to limits.

Interest from Public Provident Fund (PPF) or recognised provident fund is exempt under Sec. 10(11) and 10(12), while interest on deposits under Deposits Scheme for Retiring Government Employees, 1989 and Deposit Scheme for Retiring Employees of Public Sector Companies, 1991 is exempt under Sec. 10(15)(i) all falling under Chapter III. Such income is not recognised as income at all.

However, interest from government securities, bank deposits, National Savings Certificates and other incomes listed under Sec. 80L are only deductible from gross total income, subject to the limit of Rs. 12,000 with extra Rs. 3,000 for income from interest on securities. Sec. 80L along with other deductions such as other reliefs in Sec. 80CCC to 80U fall under Chapter VIA. Such income is part of income (gross total income) but eligible for deduction to arrive at total income.

A third category is tax rebate, which is allowed against tax under Sec. 88 at differential rates depending upon the gross total income on contributions to Public or Recognised provident Funds, subscriptions to National Savings Schemes and Certificates, repayment of housing loans to corporate employers and specified institutions, etc. There is both ceiling (sub-ceiling) in respect of some of these contributions as well as overall ceiling for deduction under Sec. 88. The rate of tax rebate could be either nil, 15 per cent or 20 per cent depending upon the gross total income. Where the proportionate salary income exceeds 90 per cent of total income for persons with gross total income below Rs.1 lakh, rebate will be at 30 per cent. This tax rebate is allowed only against tax payable and not against income. Apart from Sec. 88, there are tax rebates for senior citizens under Sec. 88B and for women below 65 years under Sec. 88C. These fall under Chapter VIII-A.

Relief in tax rate to avoid the rigours of progressive taxation is given to salary sector by spreading over the arrears of salary or any lumpsum payment like gratuity under Sec. 89 under Chapter VIII-B.

A still another factor in tax calculations is treatment of exempt agricultural income, which under the Constitution cannot be subject matter of levy of central income tax, but Central Government was advised, that such income could be included for rate purposes. Hence, though agricultural income is exempt under the statute, Finance Acts for every year provide for inclusion of agricultural income in excess of Rs. 500 to be reported and taken into account for rate purposes by a complex formula, by which those persons with taxable non-agricultural income alone will be subject to such inclusion of exempt agricultural income in lower taxable slabs without having to pay tax on it, but having to pay on the taxable income at a higher slab.

In this context, one may also remember that there are varying rates of tax applicable for different categories of income for non-residents, returning Indians, capital gains and the like so that tax calculation for such other categories would require to be worked out with reference to the Finance Act, in conjunction with statutory provisions.

The benefit of deduction under Chapter VIA will not be allowed in respect of capital gains, so that the deduction under Chapter VIA, even to the extent of Rs. 12,000/ 15,000 will be lost, if the income is solely from long term capital gains. Similarly tax rebate under Sec. 88 is not admissible with reference to the tax on long term capital gains, so that this rebate will be limited to the tax on the total income as reduced by capital gains to ensure that tax on long term capital gains will not be less than 20 per cent. It may, however, be 10 per cent, if such long-term capital gains are from listed shares and securities at the option of the assessee, if one foregoes right to indexation.

Applicable surcharge is then leviable on this net tax, if any, payable. If the credit for advance tax and tax deduction at source exceeds the amount payable, such excess amount is eligible for refund with interest. If there is a shortfall, the amount should be paid with interest.

Interest has to be reckoned at varying rates for different periods since changes in interest rates are frequent.

Even the elaborate instructions in Form 2A cannot possibly give all the steps even for calculation of tax and interest, leave alone the much larger complexities in reckoning of income. These complexities ironically are the result of constant `rationalisation' and `streamlining of the law', which is trumpeted as the objective in every Budget speech and Memorandum, which accompanies every tax proposal. It is not as though there is no way to standardise the reliefs for easier calculation, if only there had been a will.

S. Rajaratnam

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