Budget 2019 Rs 5 lakh tax cap: Income tax rebate vs income tax exemption? How Modi govt put extra money in your pocket

Budget 2019: It was just meant to be interim budget, but the announcements made by Finance Minister Piyush Goyal has managed to do what many full budgets did not. And what is that? Appease a large number of citizens taxpayers. The announcement has sops for farmers, workers of the informal sector and for salaried individuals among others. In his budget speech, Goyal said, "Individual taxpayers 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. As a result, even persons having gross income up to Rs 6.50 lakh may not be required to pay any income tax if they make investments in provident funds, specified savings, insurance etc". This Goyal announcement was met with thunderous applause that was heard in all drawings rooms of the country! 

However, the point to note is that Pyush Goyal used the term 'rebate' and not 'exemption'. Taxpayers must make sure they do not get confused with the budget terminology to ensure they benefit the most. In case they do get confused, they will lose money.  Read on to understand the meaning and applicability of these two words - Rebate and Exemption:

Income Tax Exemption:
An exemption, when given, becomes applicable to all. At present, there is a tax exemption available for income up to Rs 2.5 lakh. This means it is applicable for all whether their salaries are Rs 1,80,000 per annum or Rs 25,00,000 per annum. There are certain components which are exempted from tax such as HRA and Leave travel concession. Simply, an exempted amount is not considered for tax.

Income Tax Rebate:
A rebate is simply a concession put on an amount. You have to pay tax on the income which is saved after exemption and deduction. According to Section 87A, if your annual income is less than 3 lakh under the existing provisions, then you can claim a rebate of up to Rs 2,500. Now, the limit of Income-tax Rebate under section 87A has been increased to Rs 12,500 from Rs 2,500 for taxpayers having income up to 5 lakh.

It is applicable for only a limited number of individuals, in this case as the finance minister said, for around three crore individuals.

Now, suppose someone earns Rs 5 lakh with HRA of Rs 50,000. After the deduction, his income will be 4.5 lakh rupees. If we assume that under Section 80C, he has taken advantage of deduction of Rs 1.5 lakh, then his total taxable income will be Rs 3 lakh. Now as per the tax rate of 5%, he has to pay a tax of Rs 2,500. So, according to provisions under the previous arrangement which provides a rebate of Rs 2,500, the person will not have to pay any income tax.

In other words, the exemption reduces the total taxable income (e.g. house rent allowance, leave travel concession)  while the rebate reduces the tax outflow (e.g. rebate under Section 87 of the Income Tax Act, 1961).

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How does income tax return exemption vs rebate debate affect you? 

Balwant Jain, tax expert and investment advisor, explains that if your income is Rs 8 lakh rupees annually and you save or spend Rs 2.5 lakhs in a year through all measures of Section 80C, 80D, 80CCD (1B) NPS your taxable income becomes Rs 5.5 lakh.

Now the perception is that one with taxable income of Rs 5.5 lakh will have to pay taxes on Rs 50,000. Jain also informed that there is no change in the tax slab and neither in the tax rate. 

However, if you invest and exhaust all the possible exemptions offered under the various act of Income tax, you can save big on taxes. Read how you can save on taxes for income up to Rs 10.35 lakh.

Apart from the rebate, Poorva Prakash, Senior Director, Deloitte India also explained some other benefit proposed in the budget:

1. Nominal tax relief of Rs 3,588 has been provided to salaried employees by enhancing the standard deduction limit from Rs 40,000 to Rs 50,000.

2.  FM has announced two important incentives for the individuals owing or intending to purchase a second house property.

a. For an individual owning second self-occupied house property there will no longer be a requirement to pay taxes on the notional rental value.

b. An individual having earned a capital gain up to INR 2 Crore can invest the gain in two residential property as compared to one under the present tax regime.