Income Tax Rebate 2019 Clarification: Taxable income above Rs 5 lakh? Know what is in store for you

Budget 2019 Income Tax Relief: Finance Minister Piyush Goyal on Friday brought cheers to around 3 crore low-end taxpayers by announcing a rebate for people having annual income up to Rs 5 lakh. Section 80C of the Income Tax act provides tax exemptions up to Rs 1.5 lakh. Therefore, a person with gross income up to Rs 6.50 lakhs will not be required to pay any income tax if they make investments in provident funds, specified savings schemes, insurance etc.

"In fact, with additional deductions such as interest on a 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," said Goyal. He also proposed to increase the Standard Deduction to Rs 50,000 from the current Rs 40,000.

These proposals will come into effect after the Finance Bill 2019 is passed by the Parliament. According to CBDT chairman Sushil Chandra, the changes will come into effect from April 1. 

"Once the budget is passed, then these provisions will be implemented. They will come into effect from 1st April only," said Jitendra Solanki, Sebi-registered Investment Adviser and founder JS Financial Advisors.

The government has increased the tax rebate under Section 87A to Rs 12,500 (for Rs 5 lakh) from earlier Rs 2,500 (for Rs 3.5 lakh). The taxable income of up to Rs 5 lakh has become tax-free due to the increase in this rebate.

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Who will benefit? 

Solanki said, "There is no change in tax slabs. Only the rebate, which was at Rs 2000 for 2.5 lakh-3.5 lakh income earlier, has been enhanced to full rebate up to Rs 5 lakh. So, income up to Rs 5 lakh will get tax exempted. This Rs 5 lakh is the taxable income (after deductions) and not gross income. So even someone with an income of Rs 6 lakh invests Rs 1 lakh, can benefit from it."

What if someone with taxable income of Rs 6 lakh does not invest?

In this case, he will have to pay taxes according to existing slabs. "This is for salaried employees. If an individual's taxable income is Rs 6 lakh, he will get the standard deduction of Rs 50,000. Now, he has Rs 5.5 lakh and since this is above Rs 5 lakh limit, he won't be getting the rebate of Section 87A. So, he will not pay taxes for first 2.5 lakh, then 5% tax will be levied on Rs 2.5 lakh to Rs 5 lakh which will be Rs 12,500. Now, the next Rs 50,000 will be taxed at the rate of 20% as it is above Rs 5 lakh ceiling. So, the tax on Rs 50,000 will be Rs 10,000. In total, the person ends up paying a tax of Rs 22,500," explained Pankaj Mathpal, MD, Optima Money.

Mathpal also explained that if the individual with Rs 6 lakh taxable income invests Rs 1 lakh in tax-saving instruments, then he will have to pay zero tax as he can claim the benefit of the new rule.

CBDT's Chandra says even those with taxable income of Rs 5.5 lakh after claiming all exemptions will not be able to claim the new rebate.