The most discussed announcement in the Interim Budget 2019 has also turned out to be the most misunderstood one. Bringing cheer to the middle-class yesterday, Finance Minister Piyush Goyal announced a full tax rebate for the individuals with annual income upto Rs 5 lakh. But the announcement does not mean that the individuals in the said category will not have to pay taxes or that there is any change in income tax slabs.
Despite the budget announcements, the individuals with annual income upto Rs 5 lakh will have to pay taxes as per old rates in the Financial Year 2019-20 as well, but they will be eligible for full refund.
The finance minister said in the Lok Sabha – “For the present, the existing rates of income tax will continue for FY 2019-20 also. I propose the following changes – Individual taxpayers having annual taxable incomes up to Rs 5 lakh will get full tax rebate.”
The operative word here is 'rebate' and not 'exemption'.
Tax exemption is the income, expenditure and investments on which no tax is levied. As per the Indian tax system, individuals earning up to Rs 2.5 lakh are exempt from paying taxes.
Tax rebate, on the other hand, is a relief provided to taxpayers in the form of a refund on taxes already paid to the government. Section 87A of the Income Tax Act provides a rebate of Rs 2,500 or the tax payable (whichever is lower) for individuals with total income not exceeding Rs 3.5 lakh.
Finance Minister has proposed to revise the Section 87A of the Income Tax Act to increase the tax rebate from Rs 2,500 to full and for individuals with total income not exceeding Rs 5 lakh instead of Rs 3.5 lakh.
What this means for tax payers:
The tax rebate instead of exemption means there has been no change in income tax slab. Old slab (given below) will be applicable for next financial year as well. The tax rebate announced will only benefit people with income upto Rs 5 lakh.
So if you are:
Individual with annual income upto Rs 2.5 lakh: You will pay no income tax.
Individual with annual income exceeding Rs 2.5 lakh but not more than Rs 5 lakh: You will pay 5 per cent tax on the income exceeding Rs 2.5 lakh but will be eligible for a full refund.
Individual with annual income exceeding Rs 5 lakh but not more than Rs 10 lakh: You will pay Rs 12,500 plus 20 per cent on income exceeding Rs 5 lakh, with no additional refund.
Individual with annual income exceeding Rs 10 lakh: You will have to pay Rs 1,12,500 plus 30 per cent of the amount by which total income exceeds Rs 10 lakh.
However, the benefit of standard deduction increased by the government from Rs 40,000 to Rs 50,000 shall be available to everyone.
No tax upto Rs 7.85 lakh pa
Finance Minister Piyush Goyal, in his budget speech, mentioned that a smart tax payer could save on tax even with an income of upto Rs 6.5 lakh. But industry experts have calculated it to be upto Rs 7.85 lakh.
The taxable income is calculated after subtracting the standard dedcutions (upto Rs 50,000) and tax-free investments allowed under Section 80C (upto Rs 1,50,000), Section 80CCD(1B) (upto Rs 50,000), Section 80D (upto Rs 25,000) and Section 80TTA (upto Rs 10,000) of the Income Tax Act.
Section 80C of the Income Tax Act permits a maximum amount of deduction of up to Rs 1.5 lakh on tax-free investments like life insurance, provident fund, LIC mutual fund, Sukanya Samridhi Account, etc.
Additionally, Section 80CCD(1B) states, “As per section 80CCD(1B), an assessee referred to in 80CCD(1) shall be allowed a deduction in computation of his income, of the whole of the amount paid or deposited in the previous year in his account under the pension scheme notified or as may be notified by the Central Government, which shall not exceed Rs 50,000.”
Section 80D allows deduction in respect of health insurance premium for self and/or family members. The maximum deductible amount is Rs 25,000 and in case of a senior citizen in the family, the limit is Rs 50,000.
Lastly, Section 80TTA provides a maximum deduction of Rs 10,000 (to non-senior citizens) on income earned by way of interest on deposits (not being time deposits) in a savings account.
If a smart tax payers utilises all tools provided by Income Tax Act, he or she can bring down their txable income to Rs 5 lakh, effectively paying taxes -eligible for full refund.
24 hour tax refunds
Even though tax rebate instead of tax exemption may sound a bit less tempting, but there is nothing to fret. According to Finance Minister the income tax department will now process income tax refunds within 24 hours and release them immediately. "Within the next two years, the assessment of all tax returns should be done electronically without any personal interface," he said while delivering the Interim Budget for 2019-20.