The government has by a stroke made the taxable income upto Rs. 5 lakhs fully tax free in the hands of small taxpayers without raising the exemption limit. Most of the people have been wondering why the government is not raising the exemption limit instead of playing with Section 87A. I feel the government has very strong reasons in not enhancing the exemption limits and therefore has to play with the rebate provisions. Some of my thoughts on this are as under:

Broad basing  tax payers base

The number of people who file their income tax returns as a proportion of the population is very miniscule which is evident from the fact that  just 6.85 Crores  ITR were filed against the population of around 120 Crores. IT is still shocking to learn that out of these 6.85 Crores of people who filed their ITR, 2 Crores did not pay any tax due. These people had to file the ITR due  to various reasons like requirement to file ITR due to gross income exceeding the threshold exemption limit but no tax liability due to various deductions available. Successive governments have been making attempts to broaden the taxpayers’ base. One of such measure popularly known as “one by Six” was introduced long back but was withdrawn due to its ineffectiveness. This scheme required you to file your ITR if you satisfied one of  six conditions like having a credit card or a owning a residential house or a motor car or had electricity bill running over certain amount or had undertaken a foreign travel etc.  If this exemption limits is doubled from 2.50 lakhs to 5 lakhs, lots of people would no longer be required to file ITR and just go out of the tax network.

Data needed for decision making

The government has to gather data on the economy and other related subjects to take many major policy decisions. The government wants data and that too earlier. The government has been persuading the taxpayers to file their income tax returns earlier than what was permissible earlier. This is evident from the time window available for filing the ITR. Earlier one could file ITR for two years which has been reduced to one year as well as provision for levy of mandatory fee in case you file your ITR beyond the due date specified within the time allowed by law. These steps provide the evidence how much importance the government is giving to data and its timely collection. In case the exemption limit is raised a lot of taxpayers will go out of the tax network and making data unavailable to the government. Even if your  tax liability is nil due to your taxable income being just below the magic figure of 5 lakhs, you still are required to file the ITR  which will enable the government have access to data.

Ensuring savings for small taxpayers without losing much of tax revenue

Consumption is the key to growth of any economy, which is borne out by the US economy.  So the government wants people to spend more and at the same time ensuring that it does not lose much of the taxes. The rebate under Section 87A ensures this as it is only the small taxpayer who is able to save tax while persons earning above the threshold limit pay regular taxes.  The government knows that money saved by lower middle class taxpayer is spent whereas  the money saved by higher bracketed taxpayers generally gets saved.

As every government needs to raise its revenue it cannot afford to lose the money which it collects from taxpayers in higher tax brackets as the impact is higher in monetary terms. If the exemption limit is raised from 2.50 lakhs to 5 lakhs and the successive slabs are also raised correspondingly, the government loses Rs. 75,000 for tax bracket of 30%  whereas the loss of revenue for small tax payer is only maximum 12,500/- @ 5%. Moreover the people in 30% tax bracket have more ability to bear the tax than the people in lower nbracket.

Curb on unaccounted money

Just by ensuring that more and more people file their ITR, the government will be in a position to have records of earnings and assets of such person. If the exemption limit is raised to Rs. 5 lakhs, which is not a small amount, many ITR filers will go out of the watch of the government. Since tax department cannot  question you beyond certain number of years to detect cases of tax evasions, these people can always claim that the capital and assets were built up over the years when their income was below the exemption limit This may make  generation and usage of black money rampant.

Balwant Jain is a tax and investment expert and can be reached on [email protected], @jainbalwant on twitter. 

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  1. Sambhaw says:

    Hi Sir, with all due respect to your opinion, I beg to differ. I have no personal grudges with you, the govt or anyone having similar thought.

    All your points defending not enhancing the tax limit boils down to one common theme and that is to have more and more people under tax filling. The same can be achieved by having the taxation threshold of 1 lac and reducing the rate of tax to say 0.01%. This way, more and more people would file taxes. But the intent of government is very clearly not to do that. A salaried person is paying taxes way above the other classes. However there is no relief to them.

    In contrary, please consider the below facts as well:

    Consider a scenario (completely hypothetical but throws some light on individual filing population %)- a normal family in India will comprise of husband, wife, 2 children, 2 parents. The bread earner is 1 (pls don’t judge me basis my assumption on non working wife- this is what it is in the current era, not many are working). Then, mathematically, only 16.67% person would fall under tax bracket, isn’t it? Now rule out the rural population (and they are the majority)- labourers not earning decent money, small shopkeepers, low salaried class, etc. which will pull down the %.

    In January 2019, BJP led government introduced the 10% reservation for general category who are economically backwards. Economically backwards means if you are earning less than 8lacs p.a.
    Now think of a hypothetical scenario wherein a person is earning 8 lacs and is supporting a family of 5. As he is economically backward and the amount of education and health care expenses are in our country (I am sure you would have a 1st hand experience on this), he would not be able to save any money leave apart the dream of investing in any tax exemption schemes or home. Considering all the facts, this economically backward person would pay a tax close to 70,000 INR. A person who is not able to save money has to pay a tax of 70k.

    There can be many other instances and examples on governments financial policies which gives a good beating to the middle class of India.

    With all respect,

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June 2021