Before election that is approximate 100 days away, Interim Budget 2019 was anticipated to have a please- all package has lived up to expectations. After offering big sops to farmers and the poor, Finance minister Mr Piyush Goyal who has been given the charge of the finance ministry, has in store some key goodies for the middle-class tax payers. One of the big steps among the other measures has been suggested in the Budget 2019, Interim finance minister Piyush Goyal proposed a full tax rebate for individuals with income up to Rs. 5 lakh.
Consequently, with this increase in tax exemption limit under Section 87A, now individuals with Gross income up to Rs 6.5 lakh will not need to pay any tax if they make investments in provident funds and other instruments prescribed in Section 80C (You can save up to 1.5 lakh thorough investing in ELSS, & Other Tax saving instruments)
However, if you are thinking that in Budget 2019 interim Finance minister doubled the income tax exemption limit to 5 lakh, you have put in wrong shoes. What he has proposed is a full tax rebate on taxable income up to Rs 5 lakh under Section 87A. So, if your taxable income is over Rs 5 lakh, the current tax rates will continue to apply to you, although you still have the hiked up standard deduction and TDS thresholds to look forward to.
Let me illustrate through an Example, how you would get benefits from Rebate under sec 87A
If you have a Gross annual income of Rs 700,000 lakh for the financial year 2019-2020, and as per the standard deduction of Rs 50,000 in the Budget 2019 has been introduced, your net taxable income before 80c deduction would come down to Rs 6,50,000.
Subsequently, you can make an investment of Rs 1,50,000 under sec 80c in any tax saving instrument like PPF, ELSS (Tax saving fund), NSC, Tax saving Fixed deposit etc.
Thus, net taxable income after deductions would be come down to Rs 500,000 lakh.
On which your net tax liability would be Rs 12,500 (500,000- 2,50,000= 2,50,000*5%)
However, since your net taxable income up to 5 lakh in the financial year, you are liable to claim the rebate under section 87A for 12,500 and thus net taxable to pay will be Zero.
let’s move one step forward, to know what is 87A Deduction and how does it work
Section 87A rebate provides income tax rebate to individuals those who earn income below the specified limit. It is being provided to reduce the tax burden of lower income bracket.
Who is eligible to claim rebate under 87A?
If you are a resident in India and your total income does not exceed Rs. 500,000 (earlier it was 3,50,000 in 2018-2019 financial year) then you are eligible to claim the rebate under section 87A. For the FY 2019-2020, it is limited to Rs. 12,500 (earlier it was Rs 2,500)
Suppose your total income is Rs. 500,000 so after getting your basic exemption (assuming there is no further chapter VI A deduction) your tax liability comes to Rs.12,500 [5% of (500,000-250,000)].
Now you will get additional rebate of Rs 12,500 (in Budget 2019 it has been suggested to 12,500, earlier it was Rs 2,500), your actual tax liability shall be zero
So, while Taxpayers with net taxable yearly income up to Rs 5 lakhs currently stand to save Rs 13,000.
To put it differently, individuals with gross annual incomes under Rs 10 lakh making the most of the deductions which may be claimed under the Income Tax Act, such as those comes under Sections 80C, 80D, 80EE, are likely to benefit from this proposition.
The bad news is that the tax rebate under sec 87a will apply to those whose net taxable income – after availing all of the allowed deductions – below Rs 5 lakh threshold limit.