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Acting along expectations of the common man, especially after demonetization, the government has reduced the personal income tax rate for those in the tax slab of 2.5 lakh to 5 lakh to 5% from 10% earlier.

The Union Budget 2017-18 aims to reduce the tax liability for those earning up to Rs5 lakh to either zero or by half.

Currently, the basic exemption limit for individuals below 60 years of age is Rs2.5 lakh. The first slab rate, of 10%, applies to taxable income between Rs2.5 lakh and Rs5 lakh.

This translates into a tax liability of Rs25,000. But in financial year (FY) 2017-18, this rate will be 5%, thus reducing the tax liability by Rs12,500 for everyone.

A cess of 3% will continue to apply. The tax rate for individuals with income between Rs2.5 lakh and Rs5 lakh will be 5%.

For individuals with income between Rs5 lakh and Rs10 lakh, the rate of taxation continues to be 20% and it will be 30% for individuals earning more than Rs10 lakh.

“There was a lot of expectation around increasing the deduction limits, but nothing significant happened. For individuals with lower income reducing the tax rate is good, but after a tax rate of 5% there is a straight jump to 20% for the next slab,"said Homi B. Mistry, partner, Deloitte Haskins & Sells LLP.


But if your taxable income is up to Rs3.5 lakh, you also need to factor in the benefit of the rebate. A rebate is a relief given on the tax liability of an individual. Currently, the rebate is Rs5,000 and is for those with taxable income of up to Rs5 lakh.

The rebate has now been reduced to Rs2,500 and it would apply only if your taxable income is up to Rs3.5 lakh. Within this income limit, if someone has a tax liability of Rs2,500, she will not have to pay income tax. And, even if the tax liability in this case is more than Rs2,500, the amount will get reduced by Rs2,500. According to the finance minister, those with income of up to Rs3 lakh will be exempt from paying taxes, as their tax liability will come up to Rs2,500 and those who earn up to Rs3.5 lakh will pay a tax of only up to Rs2,500. Also, those who earn up to Rs4.5 lakh will not have to pay tax if they use up the entire deduction of Rs1.5 lakh, which is available under section 80C of the income-tax Act.


What the finance minster gave with one hand, he took away from the other. If you are part of the mass affluent Indian population with your annual taxable income at Rs50 lakh or more, get ready to pay a surcharge. Until now a surcharge was applicable for individuals earning more than Rs1 crore. The surcharge was levied at a rate of 15% taking the effective income tax rate on the super-rich to 35.54%.

But now individuals with income levels between Rs50 lakh and Rs1 crore will pay a surcharge at 10%. “The intention of the government is to reduce the tax burden on the lower income category and pass it to the high-income category," said Mistry. Accordingly the marginal rate of income tax for this income category will be 33.99%. For instance, if your annual income is Rs75 lakh, after factoring in the section 80C deduction your taxable income will come to Rs73.50 lakh. Your tax liability on this will come to about Rs20.17 lakh. A 10% surcharge on this will come to about Rs2.02 lakh taking your total tax liability to about Rs22.19 lakh. So you will pay a total tax of Rs22.86 lakh, including a cess of 3%.

However, you continue to be subject to marginal relief. Marginal relief provides relaxation to taxpayers whose income marginally exceeds the threshold limit of income (Rs50 lakh in this case) such that the net amount payable as income-tax and surcharge does not exceed the total amount payable as income-tax on total income of Rs50 lakh by more than the amount of income that exceeds Rs50 lakh.

For instance, suppose an individual earns a taxable income of Rs50.50 lakh. The total tax payable in this case will be about Rs14.60 lakh including the surcharge of 10%. Now, the total tax on Rs50 lakh is about Rs13.13 lakh and given that the income exceeds Rs50 lakh by only Rs50,000, the actual tax payable will be Rs13.28 lakh(calculated on Rs50.50 lakh without the surcharge) plus Rs35,000 (after reducing 30% tax from Rs50,000), which is about Rs13.63 lakh.“The maximum income for which marginal relief will be available is about Rs51,95,900," said Rahul Garg, leader, direct tax, PwC India.

It is hard to argue for lower taxes for those who earn over 50 lakh a year in a poor country like India.

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