Tax Rebate upto Rs 5 lakh: The real story

 

 

Ever since Interim Budget 2019, there is some confusion on whether there is income tax relief given to all citizens or not. Some people are convinced there is an income tax relief for all. Others say they have read or heard news reports about tax rebate relief.

For a common man with limited financial knowledge, all this can be very confusing. So, let us clear that confusion once and for all. The Budget has allowed individuals with taxable income up to Rs 5 lakh to get full tax rebate and so they pay zero tax. Read on to know more.

Tax slabs unchanged

There is no change in the income tax slabs. You must understand what is the difference between taxable income and total/gross income. Gross income includes all of the income a person has received during a financial year. This amount is not explicitly exempt from taxation. On the other hand, taxable income is the amount of income that is actually subject to taxation, after all deductions or exemptions. So, typically taxable income will be lower than gross/total income.

For a person aged below 60 years, up to Rs 2.5 lakh of their taxable income is not taxed.

Income between Rs 2.5 lakh to Rs 5 lakh is taxed at 5% of total income exceeding Rs 2.5 lakh. This tax comes to a maximum of Rs 12,500.

Income between Rs 5 lakh to Rs 10 lakh is taxed as at 20% of total income exceeding Rs 5 lakh.

Income above Rs 10 lakh is taxed at 30% of total income over Rs 10 lakh.

In the Interim Budget, these tax slabs remain the same. However, the Budget has allowed individuals with taxable income up to Rs 5 lakh to get full tax rebate under section 87A of the Income Tax Act.

Do remember 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 (ie. aged 80 years and above).

Tax rebate is not tax cut for all

What does full tax rebate for those with taxable income of Rs 5 lakh mean? Read the example below.

Let us assume you, a person below 60 years, has a taxable income of Rs 5 lakh. As per income tax slabs, you fall in two slabs.

First, your income up to Rs 2.5 lakh is not taxed.

Second, the excess amount above Rs 2.5 lakh is taxed at 5% of the exceeding amount. Since your taxable income is Rs 5 lakh, this means you have Rs 2.5 lakh extra over the zero tax-slab.

At 5% income tax rate, the tax liability comes to Rs 12,500. However, the full tax rebate of up to Rs 12,500 given in the latest budget means you will also pay no tax!

But what if your taxable income is Rs 5.5 lakh or Rs 6 lakh or more? The moment your taxable income crosses Rs 5 lakh, then the rebate is not applicable for you.

If your taxable income is Rs 5.5 lakh, for example, your gross tax liability shoots up to Rs 23,400. For somebody with taxable income of Rs 6 lakh, the tax rises further to Rs 33,800.

In essence, all this means your tax liability rises sharply once you cross Rs 5 lakh taxable income zone. For earning just Rs 50,000 more than Rs 5 lakh (taxable income of Rs 5.5 lakh), your tax liability is nearly 47% on the extra Rs 50,000 income.

Importance of tax-planning

Under the new income tax rules, it becomes highly important to plan taxes properly and carefully. A small mistake can cost a lot as you can understand.

Not just the pay structure, full focus and attention needs to be given to tax planning.

Those in the marginal area (just above Rs 5 lakh taxable income) should use all the tax deductions available. This is so that such individuals are not taxed more just because they forgot to claim exemptions, or were not aware of how to lower tax dues.

So, try to consult a good financial planner and prepare your tax blue-print for this year and beyond.

Reach us at 9845399780 or contactus@righthorizons.in

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How to be tax-free with Income up to Rs 10 lakh

 

The Interim Budget 2019 may not have directly touched the income tax slab rates, but a small tweak in income tax rebate is virtually doing the job for many. Salaried employees earning up to Rs 10 lakh in a year can escape paying tax if they use some of the investment and expense related deductions available. In the same breath, non-salaried individuals earning Rs 9.5 lakh do not have to pay a single paisa in income tax. All this is possible because full tax rebate has been given for taxpayers having taxable income of Rs 5 lakh. This means if your total income is more than Rs 5 lakh, all you have to do is to claim deductions so as to bring the taxable income to Rs 5 lakh or below. Read on to know more.

No more taxes

Apart from hiking standard deduction to Rs 50,000 a year, The government has not made any extra income tax deduction related announcements in Interim Budget 2019. By smartly using the norms, all of your income can be made tax-free. Of course, some might argue that claiming Rs 5 lakh as deductions out of Rs 10 lakh income is difficult. Dear friends, life is an art of possibilities. If you know there is a way, you can always succeed.

Before the Budget, taxable income up to Rs 2.5 lakh attracted no tax while taxable income falling between RS 2.5 lakh to Rs 5 lakh attracted 5% tax. In simple terms this means that if your taxable income was Rs 5 lakh, you paid tax on the Rs 2.5 lakh beyond the zero-tax income.

This 5% of Rs 2.5 lakh translated into Rs 12500 and was your income tax liability. The Interim Budget 2019 has given 100% rebate on up to Rs 12500 amount. So, there will be no tax liability for you.

How do individuals earning more than Rs 5 lakh take advantage of the situation? It is easy. If you have a salary income of Rs 10 lakh, you need to claim deductions worth Rs 5 lakh and bring your taxable income part to Rs 5 lakh.

Deduction game

Assume your salary income is Rs 10 lakh. You can make a deduction of up to Rs 2 lakh for interest paid on housing loan for self-occupied property under Section 24. This will reduce your taxable income from Rs 10 lakh to Rs 8 lakh.

Then, there is maximum Rs 1.5 lakh deduction for investments made under Section 80C (like principal paid on housing loan, insurance premium, ELSS, PPF etc.). This brings your taxable income from Rs 8 lakh to Rs 6.5 lakh.

The Interim Budget 2019 has increased the standard deduction for salaried persons to Rs 50,000 (increased from Rs 40,000 earlier). Using this standard deduction, your taxable income falls from Rs 6.5 lakh to Rs 6 lakh.

To encourage National Pension System (NPS), the income tax norms allow us to claim a maximum and separate deduction under Section 80CCD(1B) for additional investment in NPS of Rs 50,000. This when claimed will bring your taxable income from Rs 6 lakh to Rs 5.5 lakh.

Each and every nook

Lastly, you can claim Rs 25,000 medical insurance premium for self & spouse and Rs 25,000 mediclaim premium for your dependent parents. The combined Rs 50,000 premium (under Section 80D)when deduced from your taxable income of Rs 5.5 lakh brings it to the magic figure of Rs 5 lakh.

The process will be similar for non-salaried persons but they will not able to claim the Rs 50,000 standard deduction (available for salaried only). Thus, non-salaried with Rs 9.5 lakh in the above example will pay zero tax.

Below is a a table that shows your example of a salaried person (below 60 years of age).

A) Gross Income – Rs 10,00,000

B) Deductions

i) Deduction for Interest on Housing loan for self-occupied property – sec 24        – Rs 200,000

ii) Deduction – Section 80C (Insurance premium /Principal on housing loan / ELSS / NPS /) – Rs 150,000

iii) Standard Deduction for salaried – Rs 50,000

iv) Deduction under Section 80CCD(1B) – Additional investment in NPS – Rs 50,000

v) Deduction under Section 80D – Mediclaim – Rs 25,000

vi) Deduction for parents (senior citizens Mediclaim) – Rs 25,000

C) Taxable income (A minus B) – Rs 500,000

D) Income tax payable (5% of amount between Rs 2.5 lakh to Rs 5 lakh) – Rs 12500

E) Rebate under section 87A – Rs 12500

F) Net tax payable- Rs 0 (zero)

Do remember that many salaried and non salaried persons can also other deductions available under the Income Tax Act. For instance, interest paid during a financial year on an education loan is allowed as deduction for individuals from the total income under Section 80E. The deduction is provided only for the interest part of the EMI. There is no limit on the maximum amount that is allowed as deduction. If you are paying education loan interest, you can claim the maximum amount per financial year. If the amount is Rs 5 lakh per year, you will not have to do any other investments to come to zero-tax club.

Likewise, taxpayers can use the Section 80G of the Indian Income Tax Act that allows you tax deduction on donations made to any charitable organization. The various donations specified in section 80G are eligible for a deduction of up to either 100% or 50% with or without restriction, as provided in Section 80G.

Reach us at 9845399780 or contactus@righthorizons.com

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