How is There No Income Tax on Income up to ₹5 Lakhs?
Recently, Finance Minister Sh. Piyush Goyal had presented the 6th and the Interim Budget in Lok Sabha on the 1st February 2019. The budget had a large number of positive measures for all sections of the economy, including MSMEs, startups and corporate sector. For instance, MSMEs with GST registration shall get 2% interest subsidy on loan up to ₹1 crore.
However, the most fascinating update in the Union Budget 2019 is that taxpayers with annual income up to ₹5 lakhs shall pay no income tax in the financial year 2019-2020.
Many people have misinterpreted the aforesaid relief as the increase in income tax slab from ₹2.5 lakh to ₹5 lakh. However, there is a slight twist.
Let us try to understand it here.
#1. How income up to ₹5 lakhs tax-free?
One important aspect that should be clearly understood here is-
- The government has given a tax rebate on declaring income up to ₹5,00,000/- rather than increasing NIL rate income slab.
- There is as such no change in slab rate. Nil Rate Income Slab stands still at ₹2,50,000/- and above ₹2,50,000/- tax is chargeable at the rate of 5% and so on.
So how is income tax-free up to ₹5,00,000/-?
- In Budget 2019, Government has increased the Rebate relief under section 87A from the existing rebate of ₹2,500/- to ₹12,500/-.
#2. What is section 87A of the Income Tax Act 1961?
Provision of section 87A allows a rebate to the taxpayer declaring income up to the specified amount.
- The individual taxpayers have been further given relief u/s 87A by raising the amount of tax rebate to ₹12,500 from the existing rebate of ₹2,500.
- This tax rebate will currently be availed by the taxpayers having annual income up to ₹5,00,000 rather than the existing ₹3,50,000/-.
#3. How will the tax rebate relief work out?
The above rule can be easily understood by the help of a chart given below-
Particulars |
Case Study I |
Case Study II |
Annual Income |
5,00,000 |
5,00,100 |
Rates of Income Tax |
||
Income from ₹0 to 2,50,000 (0%) |
nil |
nil |
Income from ₹ 2,50,001-5,00,000 (5%) |
12500 |
12500 |
Income from ₹5,00,001-10,00,000 (20%) |
0 |
20 |
Rebate given u/s 87A (-) |
(-) 12500 |
0 |
Net Tax |
0 |
12520 |
Add: Education Cess (4%) |
0 |
501 |
Thus, Net Tax Liability |
0 |
13021 |
#4. What do we understand from the above Case Studies?
Now, from the above Case Studies, we can now make out that-
- The government has not raised the income tax slab. It has now increased the amount of tax rebate that was available u/s 87A of the Income Tax Act 1961.
- The taxpayer whose income is up to ₹5 lakhs will be able to avail this tax rebate u/s 87A during the procedure of his income tax return filing. Since, such taxpayer will be already paying income tax of ₹12,500 (5% of 2,50,000), on which he can avail a rebate of ₹12,500, he will pay no tax on income up to ₹5 lakh (12,500 - 12,500 = 0).
- Since there is no change made in income tax slab, if now income exceeds ₹5 lakh, the taxpayer can no longer claim this rebate u/s 87A during income tax return filing. Such a tax assessee will definitely need to pay income tax on income above ₹2.5 lakhs.
#5. What are other business-friendly updates in the Budget 2019?
The Budget has indeed introduced several business-friendly measures. Some of them are given here-
- MSMEs having GST registration can now avail 2% interest subsidy on the business loans of up to ₹1 crore.
- Taxpayers having a gross annual income not more than ₹6.5 lakh need not pay any income tax if they have made investments in provident funds and prescribed equities u/s 80c of Income Tax Act 1961.
- For the companies with a turnover above ₹250 crore, Direct Tax Rate has been kept at 25% for the financial year 2019-20.
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