The Old Man’s Return

Famous American Physician and Poet, Mr. Oliver Wendell Holmes Sr. said that “The young man knows the rules, but the old man knows the exceptions”. This goes well with the proposal of the Finance Bill, 2021 exempting a resident senior citizen from filing of return of income if he has the specified income and the tax thereon is deducted by the bank.

The Finance Bill, 2021 proposes to insert a new Section 194P to provide relief to a senior citizen who is 75 years or more from the burden of filing of return of income. It provides that if tax has been deducted under the newly inserted provision, such senior citizen shall be exempted from the requirement of furnishing return of income. This new provision is applicable from 01-04-2021.

Section 139 provides the situations in which the filing of return of income will be mandatory for an assessee. An individual has no obligation to file the return of income if his income does not exceed the maximum exemption limit before claiming certain deductions and exemptions. Hitherto the Income-tax Act does not contain any provision exempting a resident assessee from filing of return of income if his income exceeds the threshold limit and tax is deducted therefrom. In contrast, the non-resident assessees earning specified incomes are not required to file the return of income if the tax has been deducted therefrom. For the first time, Section 194P proposes to exempt a category of resident individuals from filing of return of income if he earns the specified income and tax is deducted therefrom by the bank.

Let’s understand the new provisions

1. About the provision

   Section 194P(2) provides that a senior citizen will not be required to file the return of income if the following conditions are satisfied:

   1. Such senior citizen should be resident in India;
   2. His age during the relevant previous year is 75 years or more;
   3. His income includes only pension and specified interest income;
   4. The interest should be received or receivable from any account maintained by such individual in the specified bank;
   5. His pension income should be received in the same specified bank;
   6. Such bank deducts income-tax on such total income on the basis of the rates in force, after allowing deduction under Chapter VI-A and rebate under Section 87A; and
   7. Such individual furnishes a declaration to the specified bank containing such particulars, in such form and verified in such manner, as may be prescribed.

   If the above conditions are satisfied, the resident senior-citizen shall not be liable to file his return of income for the assessment year relevant to the previous year in which tax has been deducted. This new provision is applicable from 01-04-2021. The banks will deduct the tax under this provision on or after 01-04-2021 and accordingly, the exemption from filing of return of income shall be available for the assessment year 2022-23 and onwards.

   The analysis of the amendment is covered in the subsequent paras.

2. Specified Resident Senior Citizens

   The Income-tax Act, for computation of tax, classifies a resident senior citizen into two categories – 60 years or more and 80 Years or more. The Finance Bill, 2021 now proposes to add one more category of resident senior citizens whose age is 75 or more during the previous year. Thus, a resident senior citizen will be covered under this clause if he completes 75 years of age on or before 31-03-2022. In other words, to avail the exemption from filing of return for the assessment year 2022-23, the resident individual should be born on or before 31-03-1947.

3. Specified Income should be earned

   Explanation (b)(ii) to Section 194P provides that the resident senior citizen should be having income of the nature of pension and no other income except the income of the nature of interest received or receivable from any account maintained by such individual in the same specified bank in which he is receiving his pension income.

   Paraphrasing, this Explanation has a pre-requisite that the senior citizen should have:

   1. Pension income;
   2. Interest income received or receivable from any account maintained in such bank;
   3. No other income.

   3.1 Whether Pension Income covers family pension?

   When pension is received by a dependent family member of the retired individual after his death, it is known as family pension and is taxable as ‘income from other sources’. In other words, the amount received by a retired individual is considered as ‘pension’ and when after this death it is received by the family members, it is termed as ‘family pension’. As the meaning of the term ‘Pension’ has not been defined anywhere in the Income-tax Act, but due to its different treatment under various provision, it may be said that the pension does not include family pension.

   However, as the objective behind such proposal is to reduce the compliance burden of senior citizens, it is pleaded that family pension should also be eligible for this benefit. Thus, if an eligible senior citizen receiving the family pension after the death of her spouse, she should get the relief under this provision from the filing of return of income.

   3.2 Which interest income should be earned?

   This provision provides that the interest income should be received or receivable from any account maintained in such bank. As the legislature has chosen ‘from any account’ over ‘in any account’, it restricts its scope to that interest income only which accrues or arises from a bank account. An individual can earn interest income from his bank account by way of interest on the amount deposited in the saving bank account or fixed deposits.

   Thus, as long as the senior citizen parks his money in saving bank account or fixed deposit, he will be covered under this provision. If he earns any other interest income, he will not be covered under this provision. Example, interest on debentures, interest on income-tax refunds, interest from loan given to friends or family members, etc.

   3.3 Whether exempt income should be considered?

   Considering the intention of the legislature, this provision should be read liberally. Thus, if a resident senior citizen is earning exempt income, like, interest on PPF, agriculture income, share of profit from the partnership firm, etc. he should not be treated as ineligible for this provision.

4. Specified income should be credited in one bank

   This provision applies only if both the incomes are earned and credited in the account maintained with a specified bank. If a resident senior citizen maintains bank accounts with two or more banks and he earns any interest income on the deposits with such banks, he becomes ineligible to avail the benefit of this scheme. Banks, in such a case, will solely rely on the information declared by the senior citizen in the form to be specified. If he declares that he is not maintaining any account with any other bank, the bank shall apply this provision for deduction of tax at source.

   If the Income-tax Deptt. subsequently finds any discrepancy in the information declared by the senior citizen, and it has the effect that he did not offer certain income to tax, the deptt. may ask him to file a return of income. In such a situation, the dept. will initiate the re-assessment or best judgment proceedings.

5. Specified Banks are allowed

   Explanation (a) to Section 194P authorizes only the specified banks, to be notified by the Central Govt., for this provision. Thus, if a resident senior citizen operates a bank account to receive pension/interest income in a co-operative bank or a non-specified bank account, he shall not be eligible for this relief.

6. Banks to compute and deduct tax

   Section 194P shifts the obligations to compute the total income of the senior citizen on the banks. The bank shall compute the income after giving effect to the deduction allowable under Chapter VI-A (Sections 80C to 80U) and the rebate under Section 87A. The bank, thereafter, shall compute the total tax on such income at the rates in force and deduct the tax accordingly. Consequently, the employer will not be liable to deduct the tax under Section 192 from the pension income. Further, it will be a relief for the senior citizens who have to submit the proof of payment of the advance-tax to get the family pension.

   The Finance Act, 2020, has introduced a new Section 115BAC to provide an alternative tax regime in case of individuals or HUF. In case an assessee opts for Section 115BAC, he shall not be allowed to claim various exemptions and deductions. Further, tax rates prescribed under new tax regime are lower as compared to the existing tax regime. In order to compute total income of assessee and tax thereon, deductor should know whether assessee opted for Section 115BAC or not. Thus, it is likely that the declaration will include a clause regarding same wherein deductee has to declare whether he wishes to opt for Section 115BAC regime or not.

7. Time of deduction

   The proposed section has not prescribed the time at which tax is required to be deducted under this provision.