New Delhi: Finance Minister Piyush Goyal in his budget speech on Friday declared a complete tax rebate for those earning upto Rs 5 lakh per annum, leading to widespread cheer among the middle class.
However, there is a catch.
The operative word here is rebate. This is not an exemption limit that has been raised, and therefore, does not apply to everybody. It only applies to those earning upto Rs 5 lakh a year. Those making more than Rs 5 lakh a year will continue to pay taxes as they were earlier.
Shalini Jain, Partner at EY India told News18, “This means that anyone with net taxable income up to Rs 5 lakh will not be required to pay any taxes. However, anyone with net taxable income above Rs 5 lakh will not be able to avail this tax benefit and only get standard deduction benefit.”
In the Finance Bill, 2019 the maximum amount of tax rebate under section 87A of the Income Tax Act has been proposed to increase to Rs 12,500 from the existing Rs 2,500.
Currently, income up to Rs 2.5 lakh for resident individuals (age below 60 years) is exempt from tax. Similarly, for senior citizens aged 60 years and above but below 80 years, income up to Rs 3 lakh is exempt from tax.
Income up to Rs 5 lakh is exempt from tax for super senior citizens (age 80 years and above).
For those earning upto Rs 6.5 lakh in a year can also opt to invest Rs 1.5 lakh in a year and thus pay no income tax due to 80C deductions.
It was widely expected that the government would raise the exemption limit, but the government took the rebate route to reach out to the middle class in the election year budget. The NDA has dangled the carrot of more cuts in a full-year budget, essentially signaling to the middle class that vote us to power again if you want a higher exemption limit.
"It is essentially a move for those earning on the lesser side. One needs to understand that tax rates remain absolutely the same for those earning taxable income above Rs 5 lakh. This is not an increase in exemption limit, therefore there is no blanket applicability of it. This is rebate under section 87A," said D K Srivastava, chief policy advisor, Crisil.
In Budget 2017, Jaitley slashed the tax rate for income between Rs 250,001 and Rs 5 lakh to 5 per cent from 10 per cent earlier. This rate cut gave a tax relief of Rs 12,500 to every taxpayer.
Simply put, if your net taxable income after availing all the deductions under section 80C to 80U of the Income tax act does not exceed Rs 5 lakh, then you will not be required to pay any tax. However, if your net taxable income (after availing deductions under section 80C to 80U), exceeds Rs 5 lakh then taxes will be calculated as per the current tax structure.