Tax Exemption upto 5 Lakhs Mystery Explained

   1^st February, 2019 was the day when the common salaried man jumped off with happiness and fell down with confusion. Yes, it was the day when the Finance Minister Mr. Goyal declared during presenting the interim budget that there will be no tax on income up to Rs. 5 lakhs. This was the great news for the salaried people. However, soon it created confusion among them for there was no clear understanding of the difference between tax exemption and tax rebate.

 

This article will help you clear all your confusions, doubts and will help you understand how much actually you need to pay tax and how much you are getting exemption in this financial year.

 

“No tax up to Rs. 5 lakhs”, this statement by our FM means that this relief is ONLY for those taxpayers whose income is within Rs. 5 lakhs. Earlier, there was a rebate of Rs. 2,500 on income up to Rs. 3.50 lakhs. According to the new budget update, the limit has been increased from Rs. 3.50 lakhs to Rs. 5 lakhs. Also, the rebate has been increased from Rs. 2,500 to Rs. 12,500. Thus, there will be exemption upto Rs. 5 lakhs under section 87A.

 

Section 87A provides income tax rebate to individuals earning within a specified limit. The rebate is given from the total tax payable by the individual. Thus, this rebate is just subtracted from the total tax payable, and not from the total income.

 

Earlier, according to section 87A, an individual was entitled to a tax rebate of Rs. 2,500 if his total annual income did not exceed Rs. 3.50 lakhs. So, a person earning within this threshold limit could avail this benefit. It should be noted here that under this section,only individuals earning within Rs. 3.50 lakhs annually,and not HUFs, companies, partnership firms, LLP, etc.,could claim this rebate. Also, the provisions were for those individuals residing in India and not for NRIs.

 

The finance minister has amended this section where the tax rebate limit has been increased from Rs. 2,500 to Rs. 12,500. This suggests that all the individuals whose income does not exceed Rs. 5 lakhs per year can avail this rebate of Rs. 12,500. If your tax payable amount is lower than Rs. 12,500, then this amount will be the rebate under this section. The rebate is applied to the total tax amount before adding the education cess of 4%.

 

Even if your annual income exceeds Rs. 5 lakhs by just few hundreds, you still have to pay the tax of Rs. 12,500. This can be explained with simple calculations for two cases.

 

Case 1 :

Total income after all deductions – Rs. 500000

Income Tax                                  – Rs. 12,500

Tax rebate under section 87A –Rs. 12,500

Net Tax – Rs. 0

Education Cess (4%) – Rs. 0

Total Tax – Rs. 0

 

Case 2 :

Total income after all deductions – Rs. 500100

Income Tax                                  –Rs. 12,520

Tax rebate under section 87A     – Rs. 0

Net Tax                                        – Rs. 12,520

Education Cess (4%)                   – Rs. 500.8

Total Tax                                      – Rs. 13,020.8

 

 

The above example makes it pretty clear, I guess.

 

So, the income tax structure for individuals below 60 years of age can be summarized as –

No tax up to Rs. 2.5 lakhs annual income

5% tax on income between Rs. 2,50,001 and Rs. 5 lakhs per year

20% tax on income between Rs. 5,00,001 and Rs. 10 lakhs per year

30% tax on income above Rs. 10 lakhs per year

 

Finally,we can end up with a quick revision. If your net taxable income after all deductions is less than 5 lakhs annually, you need not to pay tax. Thus, by now the mystery is clarified. If you have any questions left, do ask us in the comment section below and our experts will help you with them.

If you want to know how you can save yourself from the tax burden under various sections of the income tax law, you can refer to our article here. {link to tax saving tips article}