Budget 2019: Common man's Rs 5 lakh salary tax free? Your income tax rates decoded

Budget 2019: A slew of tax reliefs were given to salaried employees, in fact about 3 crore middle class people will not even have to pay any taxes. Well, everyone expected this Budget 2019 to  be surprising, but no one could have imagined the amount of tax relief announced by Prime Minister Narendra Modi government. In fact, taxpayers and their taxes was the trump card in Modi’s kitty for this fiscal year FY20. This Budget 2019, definitely sets a positive course for NDA government’s battle in elections 2019 against opposition parties. It's ache-din for all those salaried employees who earn Rs 5 lakh, as now they will not have to pay any taxes. At least this is what interim Finance Minister Piyush Goyal has announced. But interestingly, there are some hidden clarifications which has slipped through the minds of employees and citizens, in the midst of Rs 5 lakh tax free bubble. To be very accurate, it is one big tax relief to middle class earners, but not all amount is still clarified to be tax free. 

The tax-free good news! 

FM Goyal said, “Because of major tax reforms undertaken by us during last four and half years, both tax collections as well as tax base have shown significant increase, achieving a moderate taxation- high compliance regime.  It is, therefore, just and fair that some benefits from the tax reforms must also be passed on to the middle class taxpayers”

Thereby, he announced that, individual having taxable annual income up to Rs 5 lakh will get full tax rebate and therefore will not be required to pay any income tax. 

Talking about this big movement, Archit Gupta, Founder & CEO ClearTax said, “In a very welcome move, the FM reduced tax outgo to zero for those with income upto Rs 5L. Those with income upto Rs 5L will not pay any tax. However, this is not an increase in minimum exemption limit, which stays at Rs 2.5L.”

Gupta adds, “Those with income exceeding Rs 5L will pay tax on income between Rs 2.5L-5L @ 5% as before. Taxpayers with total income not in excess of Rs 5L will be offered rebate of zero tax via section 87A.”

What this means is that, the income tax exemption is still Rs 2.5 lakh which is tax free. While taxpayers having above Rs 5 lakh will continue you to pay tax rate of 5% which is currently for Rs 2.5 to Rs 5 lakh. But then again, there is also 20% tax rate which is levied for income between Rs 5 lakh to Rs 10 lakh - and has not seen any clarification from the government. This move gives relief to taxpayers earning below Rs 5 lakh and are under age category of less than 60 years old and between 60 years old to 80 years old. 

There was also demand for cut in tax rates of salary above Rs 10 lakh - which currently a taxpayer pays at 30% tax rate to IT department. However, in this regards there are no changes made. 

But also, this Rs 5 lakh move comes as not so good news to senior citizen falling under the age category of above 80 years, because they already have complete tax rebate on salary up to Rs 5 lakh. 

Going ahead, even in Rs 5 lakh tax rebate, there are loopholes. For instance, Gupta says, “The Rs 5L tax rebate under section 87A may be challenging to implement.”

Currently, under section 87A of IT Act, a taxpayer can avail some tax relief who fall under the bracket of 10% rate or Rs 2,500 and earning up to Rs 3.5 lakh. However, it has now been proposed that, a taxpayer can avail tax rebate of Rs 12,500 from previous Rs 2,500. From Rs 3.5 lakh, this salary class has been increased up to Rs 5 lakh. 

This means, not entirely everything will be tax free for salaried employees earning Rs 5 lakh. They will still pay taxes after the exemptions under section 87A are deducted. 

Hence, Rs 5 lakh is completely tax free needs some clarity. 

Gupta says, “Most taxpayers can claim this rebate while filing their tax return, since only at the time of filing their tax return, they will know exactly how much total income they have earned and the section 80 deductions they are actually claiming to become eligible for this rebate.”

#Budget2019 पर सबसे तेज और धमाकेदार कवरेज देखिए #BudgetWithZEE पर | @AnilSinghviZEE https://t.co/dLiybAfvan

— Zee Business (@ZeeBusiness) February 1, 2019

Apart from this, Gupta added, “What the salaried will rejoice is the increase in standard deduction from Rs 40,000 to Rs 50,000. Also applicable to pensioners.”

For salaried persons, Standard Deduction is being raised from the current  Rs.40,000 to Rs.50,000. “This will provide additional tax benefit of  Rs.4,700 crore to more than 3 crore salary earners and pensioners”, the FM informed. Such will definitely reduce the burden of taxes paid by salaried employees earning above Rs 5 lakh.

Interestingly, the FM opened a further window for pensioners and middle class earners by making their income up to Rs 6.5 lakh tax free as well. However, such benefit can be availed only after a taxpayer earning up to Rs 6.5 lakh makes an investment in government schemes like  provident funds, specified savings, insurance etc. 

In fact, Goyal said,  “with additional deductions such as interest on home loan up to Rs.2 lakh, interest on education loans, National Pension Scheme contributions, medical insurance, medical expenditure  on senior citizens etc, persons having even higher income will not have to pay any tax.” This section needs clarity as well, because if income even higher than Rs 6.5 lakh can be tax free by just investing in government schemes, will be used as a medium by many taxpayers above this salary class.

Thereby, a further clarity and threshold limit is needed in regards to tax rebate given to Rs 5 lakh salary class, and also earnings above it. As an advice to taxpayers, one should always make sure to check with an expert or Chartered Accountant while filing for returns about their income tax slabs. It is always wise to be a vigilant and alert taxpayer!