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Budget 2019: Tax break for Rs 5 lakh earners is huge tax planning incentive for middle income group

Taxpayers very close to the threshold limit will have to ensure their income does not exceed Rs 5 lakh.

, ET Bureau|
Last Updated: Feb 04, 2019, 06.30 AM IST
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Taxpayers who are very close to the threshold limit will have to ensure that their income does not exceed Rs 5 lakh.
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The Budget has reduced the tax burden on small taxpayers by giving full tax rebate to those earning up to Rs 5 lakh a year. But even those with higher income can escape the tax net if they claim tax deductions under various sections. “Even persons having a gross income up to Rs 6.5 lakh may not be required to pay any tax if they make investments in specified savings,” Interim Finance Minister Piyush Goyal said in his Budget speech. For instance, someone earning Rs 7 lakh can be tax free if he invests Rs 1.5 lakh under Section 80C and puts Rs 50,000 in the NPS under Section 80CCD(1b).

The rebate enhances the existing benefit under Section 87A. Till now, those earning up to Rs 3.5 lakh a year were eligible for a tax rebate of Rs 2,500. This year’s proposal has hiked this to Rs 12,500 and raised the eligibility to Rs 5 lakh. Though high income earners will not be affected by the rebate, taxpayers in the lower income group will save up to Rs 13,000 in tax from the proposal. An estimated three crore taxpayers will be out of the tax net, costing the exchequer about Rs 18,500 crore in revenue foregone. “Only low-income taxpayers will gain from the rebate. For others, there is very little change,” says Sudhir Kaushik, Co-founder of tax filing portal Taxspanner.com.

How much tax will you save?
About three crore low income taxpayers will gain from the rebate.


Also read: Why tax sop for Rs 5L earners is a surgical strike


Calculations by: Cleartax.com

The only benefit for high income earners is the Rs 10,000 hike in the standard deduction to Rs 50,000. This will bring down the annual tax of salaried taxpayers by a negligible Rs 3,000. Experts have welcomed this move because the impact of the standard deduction was curtailed last year by the removal of tax exemption to transport allowance and medical reimbursements. “Increasing the standard deduction to Rs 50,000 will make the benefit more meaningful. The move will benefit 80-90% of salaried taxpayers,” says Archit Gupta, Founder and CEO, Cleartax.com.

Focus on tax planning
The Budget proposals are likely to put greater stress on tax planning. Taxpayers who are very close to the threshold limit will have to ensure that their income does not exceed Rs 5 lakh. Right now, anybody with an annual taxable income of up to Rs 3.5 lakh is eligible for a tax rebate of Rs 2,500 under Section 87A. But that rebate vanishes if the income exceeds Rs 3.5 lakh by even one rupee.

Many taxpayers are also not aware that interest from fixed deposits, bonds and certain small savings schemes is fully taxable. It is added to the income of the taxpayer and taxed at the normal rate. Such taxpayers might skip declaring this income in their return and claim the rebate. But they might be in for a shock if the addition of this interest takes their total income above the Rs 5 lakh threshold and makes them ineligible for the rebate. “Most taxpayers can claim this rebate only at the time of filing their return. Only at the time of filing their tax return will they know exactly how much is their total income and deductions,” says Gupta of Cleartax.com.

Experts say the Budget proposals will encourage taxpayers to save aggressively in tax saving options. For instance, the NPS benefit under Section 80CCD(2) can reduce the taxable income significantly. Under this, up to 10% of the basic pay of the employee put in the NPS by the employer is tax deductible. “Now that 60% of the maturity corpus of NPS is tax free and one can withdraw for emergencies, it makes sense to use the pension scheme for saving tax,” says Kaushik of Taxspanner.com.

It is also believed that the Budget will make tax compliance easier for taxpayers. “The additional rebate and relief from TDS would not only reduce tax burden but would also bring down cost of compliance for tax payers and cost of tax administration and interest outgo on refunds for the Government,” says Kaushik Mukerjee, Partner-Tax & Regulatory Services, PwC. Though the Budget has brought cheer to taxpayers, there is nothing in particular for senior citizens above 60 and the very senior citizens above 80. Last year’s Budget had raised the TDS threshold for senior citizens to Rs 50,000. Also, very senior citizens have a basic exemption limit of Rs 5 lakh. So the proposed rebate will not affect them at all.
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