Post Demonetization, those who had cash savings at their home are now depositing the it in the bank and as the limit has been set at 2.5 lacs there is a lot of confusion over the income tax compliance process. People think that by depositing 2.5 lacs the bank account holder can earn basic income tax exemption. However, this would not be the case if this deposit is counted as income tax for the current financial year. It is important to understand the concept properly before depositing the money in the bank account and expecting an income tax limit.
No Tax Upto 2.5 Lakhs
Income Tax Act states that the basic income earned by the an Individual is exempt from the tax which implies that the income tax can only be levied only after the certain level of income. Those who are below 60 years of age, their income of upto 2.5 lakhs is exempted Income tax irrespective of the earning individual being a male or a female. This is a big relief and encouragement for those who have just started earning as they need not to pay tax for the first penny that they earned. While calculating the tax on the income of an Individual, 2.5 lacs is exempted and then tax rate of 10% is levied for the income above 2.5 lakh up to 5 lakhs.
For instance, an Individual who is earning taxable income of 2.20 Lakhs per annum, is not liable to pay any tax on his income because the basic exemption limit is upto 2.5 lacs. However, if the income is 3 lakhs per annum then first 2.5 lakhs is not taxable and the remaining 50000 will be taxed at the rate of 10% plus 3% cess.
No Double Exemptions
If anyone is under the impression that the extra 2.5 lakhs that has been deposited in the bank account will not attract any tax then they might be wrong. If an individual is earning salary of say 3 lakhs per annum and has deposited 2.5 lakhs in his/her bank account then no income tax exemption will not be applicable on the extra 2.5 lakhs deposited. This is because, that individual is already taking the exemption on the 2.5 lakhs out of 3 lakhs that he has earned on his salary. Therefore, income tax department will not allow to take the exemption twice. This means that the extra 2.5 lakhs in the bank account will be subjected to the income tax in that particular year.
The amount that an individual is depositing in the bank account other than his salary will be recorded as additional income and will be subjected to the appropriate income tax rate.
An individual should make sure that he is depositing the money in the bank account only if he can explain the source. The government is keenly watching all the deposits and monitoring the accounts of all the persons who have filed ITR and disclosure. However, housewives, freelancers and small business owners who have some cash in hand need not to worry about the scrutiny and assessment of any kind. The government has mentioned times and again that it is tracking big fishes.