Not everyone will benefit from tax rebate on up to ₹5 lakh unlike in the case of tax exemption on income slab
Are you wondering whether you will get the benefit or not? Here is the math
When finance minister Piyush Goyal announced tax rebate for income up to ₹5 lakh, it brought in immediate cheer to the salaried individuals. Dig deeper and not all benefit from it. Are you wondering whether you will get the benefit or not? Here is the math:
Standard deduction will impact all
Firstly, you should understand that all the basic tax exemption remains unchanged. Hence, if your income is between ₹2.5 lakh and ₹5 lakh you will be taxed at 5%, for income from ₹5 lakh to ₹10 lakh the tax is at 20% and 30% tax for income of ₹10 lakh and above. There are two components that changed in the budget that will have an impact on your income tax —tax rebate for income up to ₹5 lakh and increase in standard deduction from ₹40,000 to ₹50,000.
In the previous year’s budget, the government had reintroduced standard deduction in place of the earlier exemption of transport allowance and medical expense reimbursement. It then was a fixed amount of ₹40,000 for deduction irrespective of the expense incurred and to claim it you don’t need to provide any proofs. This amount has been increased to ₹50,000. “The increase in the standard deduction will impact all individuals in the taxable income. If you are in the highest tax bracket of 30% with an income between ₹10 lakh and ₹50 lakh, the increase of ₹10,000 in your standard deduction means you will save ₹3,090 in tax," said Vaibhav Sankla, managing director, H&R Block India.
Tax rebate is not for all
The tax rebate will impact those individuals who have an income of less than ₹5 lakh. A rebate is the amount of tax you are not liable to pay. According to the Finance Bill, the maximum amount of tax rebate will increase to ₹12,500 from the existing ₹2,500. The nil tax will be offered to taxpayers having total income up to ₹5 lakh, instead of the existing ₹2.5 lakh. If your income is higher than ₹5 lakh, you can make investments in instruments eligible for tax deduction such as provident fund, insurance, housing loan, pay premium for medical insurance, and bring your tax liability down. However, this does not work for all. Technically if you have an income of around ₹10 lakh, you still can get the rebate if you invest ₹1.5 lakh in instruments eligible for 80C (products such as provident fund, equity-linked mutual fund and public provident fund), ₹50,000 in National Pension System, ₹2 lakh as interest on home loan, ₹75,000 as premium for medical insurance for self and senior citizen parents and also factoring the standard deduction. “However, in real life an individual earning around ₹10 lakh, may not have all the deductions. Hence, it is safe to say that most individuals with an income of around ₹7-8 lakh are likely to get this benefit provided they invest in the eligible instruments," said Gautam Nayak, tax partner at CNK & Associates.
What does it mean?
Most individuals with income up to ₹7-8 lakh are likely to gain from the change.
All those who don’t fall in the tax rebate will see a slight change in tax due to the increase in standard deduction. It is only in rare cases that people with income of over ₹10 lakh are likely to get the rebate.
Those who are eligible to get a rebate will have to file returns.