No tax on Income up to Rs. 5 Lakh as per Interim Budget 2019

no-tax-on-income-up-to-rs-5-lakh-as-per-interim-budget-2019, No tax on Income up to Rs. 5 Lakh as per Interim Budget 2019, Govt increases income tax exemption limit to Rs. 5 lakh per year, rebate under section 87A of Income tax Act 1961, rebate is 100% of income tax payable on the total taxable income of up to rs 5 lakh, Income Tax exemption upto Rs. 5 lakhs,

Soon after the presentation of Interim Budget 2019 by the Finance Minister Mr. Piyush Goyal, it was believed that income up to Rs. 5 lakh was made exempt from tax and no tax will be required to be paid up to an income of Rs. 5 lakh. This is not true and in this article, we will be discussing the true character of no tax on income up to Rs. 5 lakh and unveil the truth lying behind the secret.

On 1st February 2019, our Finance Minister Mr. Piyush Goyal presented the Interim Budget 2019 and announced various direct tax proposals. Soon thereafter, the media was flooded with breaking news that income up to Rs. 5 lakh was made tax free and no tax is required to be paid up to income of Rs. 5 Lakh. This brings smile and cheers among taxpayers believing that their tax outgo in the FY 2019-20 will be reduced substantially and will get large relief. Actually, the media misinterpreted the speech of the Finance Minister and therefore created a lot of confusion. The Finance Minister in his speech on this issue told the parliament that Individual taxpayers having taxable annual income up to Rs. 5 lakh will get full tax rebate.”

The way this statement was presented by the media was giving the impression that the basic exemption limit was raised to Rs. 5,00,000 which presently stands at Rs. 2,50,000.

Soon thereafter the government came out with a clarification that annual taxable income of Rs 5 lakh was not the basic exemption limit but the limit of taxable income up to which rebate will be allowed.

So the basic issue here was that the limit of income was raised for allowing rebate and not the basic exemption limit i.e. the maximum amount of income which is not chargeable to tax.

In this context, it is pertinent to note that the provision of allowing rebate already exists in the income tax law. Presently, the limit of total income for getting the rebate is Rs. 3,50,000 and the rebate is allowed u/s 87A of the Income Tax Act, 1961. The maximum amount of rebate that will be allowed is Rs. 2,500. If the total income exceeds Rs. 3,50,000 no rebate will be allowed u/s 87A and full tax on total income is payable. The Interim Budget proposed to increase the limit of Total Income for availing the rebate u/s 87A from Rs. 3,50,000 to Rs. 5,00,000. Further, the maximum amount of rebate is also proposed to increase from Rs. 2,500 to Rs. 12,500.

Thus according to the proposal if the total income does not exceed Rs. 5,00,000 rebate up to Rs 12,500 will be allowed from tax liability. If the total income exceeds Rs. 5,00,000 no rebate will be allowed u/s 87A and full tax on total income is payable. So for those having total income is more than Rs. 5,00,000 there is no benefit proposed in the Interim Budget and since tax rates were not changed, the tax liability will remain the same. This proposal will not reduce the tax liability of a person whose income is more than Rs. 5 Lakh.

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Let us study the impact of the tax rebate on tax liability before and after the Interim Budget 2019 for different level of ‘Total Income’ or ‘Taxable Income’.

The tax rate for individual taxpayers is given in the below Table 1-

Income Tax Slabs for Individual Tax Payers (Less Than 60 Years Old)
for FY 2018-19 and FY 2019-20
Income Tax Slabs
Tax Rate
Income up to Rs 2,50,000
No Tax
Income over Rs 2,50,000 but less than Rs 5,00,000
5%
Income over Rs 5,00,000 but less than Rs 10,00,000
20%
Income more than Rs 10,00,000
30%

Based on the above table, the tax liability of an Individual is given under –

For Financial Year 2018-19
Taxable Income in Rs.
2,75,000
3,00,000
3,50,000
3,50,001
5,00,000
5,00,001
Income Tax is Rs.
1,250
2,500
5,000
5,000
12,500
12,500
Tax Rebate u/s 87A is Rs.
1,250
2,500
2,500
N.A.
N.A.
N.A.
Tax liability
Nil
Nil
2,500
5,000
12,500
12,500
For Financial Year 2019-20
Taxable Income in Rs.
3,00,000
3,50,000
5,00,000
5,00,001
Income Tax is Rs.
2,500
5,000
12,500
12,500
Tax Rebate u/s 87A is Rs.
2,500
5,000
12,500
N.A.
Tax liability
Nil
Nil
Nil
12,500

In the FY 2018-19 when the taxable income is Rs. 2,75,000, the computed tax comes at Rs. 1,250 [(Rs 2,75,000- Rs. 2,50,000) * 5%]. Since the taxable income is less than Rs. 3,50,000 he is entitled to the rebate u/s 87A and the amount of rebate - tax amount or Rs. 2,500, whichever is less, will be allowed. Since the tax amount is Rs. 1,250, a full rebate of Rs. 1,250 is allowed and the ultimate tax liability is ‘Nil’. 

If the taxable income is Rs. 3,00,000 then the computed tax amount is Rs. 2,500 and the rebate is also allowed for Rs. 2,500 and the ultimate tax liability is ‘Nil’. Same is the case in FY 2019-20 for the same taxable income of Rs. 3,00,000. The ultimate tax liability in both the years is ‘Nil’.

When the taxable income is Rs. 3,50,000, the computed tax liability is Rs. 5,000 for both the years as there is no change in tax rate slabs as given in Table 1 above. However, in FY 2018-19, maximum amount of rebate allowed u/s 87A is Rs. 2,500 whereas it is increased to Rs. 12,500 in FY 2019-20. Thus, in FY 2019-20 for the income level of Rs. 3,50,000, the ultimate tax liability after tax rebate is Rs. Nil whereas the ultimate tax liability after tax rebate for preceding FY 2018-19 is Rs. 2,500. There is a benefit of Rs. 2,500 in FY 2019-20 due to the proposal proposed in the Interim Budget 2019 compared to FY 2018-19. It is also significant to note that the level of income for ‘Nil’ tax is raised from Rs. 3,00,000 to Rs. 5,00,000 in FY 2019-20. In other words, no tax is payable if Total Income does not exceed Rs. 5,00,000 in FY 2019-20.

Further, due to raising the limit of taxable income to Rs. 5,00,000 for claiming rebate u/s 87A and increasing the amount of rebate to Rs. 12,500 in the Interim Budget 2019, the ultimate tax liability after tax rebate gets reduced by Rs. 12,500 at the taxable income level of Rs. 5,00,000. 

In FY 2018-19, for taxable income of Rs. 5,00,000, the ultimate tax liability after tax rebate is Rs. 12,500 whereas the ultimate tax liability after tax rebate is reduced to Rs. Nil in FY 2019-20, thereby benefit of Rs 12,500 in the ultimate tax liability after tax rebate due to high tax rebate proposed by Interim Budget 2019.

But when the taxable income exceeds Rs. 5,00,000 even by Re 1, there is no benefit to the individual taxpayers and since there is no change in tax rate slabs as mentioned in Table 1 above, the tax liability remains same for both the years.

From the above calculation, it can be concluded that Rs. 5,00,000 is not the basic exemption amount but the level of income upto which rebate will be allowed and in full.

The summary of the proposed amendment is –

  1. Income limit for tax rebate raised from Rs. 3,50,000 to Rs. 5,00,000
  2. Amount of rebate raised from Rs. 2,500 to Rs. 12,500
  3. There is no change in Tax liability over taxable income of Rs. 5,00,000.
Remember, the rebate of Rs. 12,500  is like a tax credit available to a taxpayer which one can adjust against his tax liability computed in accordance with the income tax slab rates as depicted in Table-1 above.

Calculator- Please use the below calculator to get the tax liability after tax rebate for FY 2018-19 and FY 2019-20. Only enter the taxable income in the Green cell and the result for both the years will be auto calculated.

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