05 Feb 2019Posted By: Mudit Handa


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/-? enlightened

  • 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.

Also, watch the video on .

If you need any help regarding GST registrationGST return filing procedure or the Income tax return filing, feel free to contact our business advisor at 8881-069-069.

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