Budget 2019: Are you eligible for the income tax rebate?


With all the hue and cry over the tax rebate available for income below INR 5 lakhs, some of us are confused about the exact implication of the announcement in the recent interim Budget 2019 and who all does it apply to.

The major changes, which bring in tax relief for middle-class and salaried individuals, include the following –

  • Full tax rebate if the taxable income is INR 5 lakhs or below, and
  • Increase in the standard deduction (available to salaried employees only) from INR 40,000 to INR 50,000 (irrespective of income level).

However, the fine print should not be missed.

First of all remember that it is an interim budget before the elections and there will be another budget by the incoming government after the elections.

Secondly, all the proposals will come into effect from April 1, 2019 and hence will be applicable from FY 2019-20 onwards (and not the current FY).

Now to the fine print.

The Budget proposed a tax rebate for those having taxable income up to INR 5 lakhs. The tax slabs, however, have not changed.

What does rebate mean?

The government wanted to give relief mainly to the middle-class and not everyone. So instead of revising the tax slabs for everyone, they have introduced a rebate which will only be applicable to those with taxable income (after all allowed deductions and exemptions like HRA, 80C etc) upto Rs 5 lakhs.

However, for high income earners, whose net taxable income, after all available deductions and exemptions, is more than INR 5 lakhs, there is no rebate.

Examples

Let’s understand with the help of some examples:

Example 1 - Gross annual income of INR 7.5 lakhs

The taxable income and tax would be calculated as below:

Gross annual income INR 7.5 lakhs
Less: Section 80C deductions (ELSS investments, PPF contributions,
life insurance premium, home loan principal repayment, etc.)
INR 1.5 lakhs
Less: Additional NPS Contribution INR 50,000
Less: Standard deduction (only if you are an employee, otherwise 0) INR 50,000
Net taxable income INR 5 lakhs
Rebate applicable Yes
Net tax liability (as per the proposed rules) Nil

Here, as the net taxable income is less than or equal to INR 5 lakhs, the rebate will be applicable and the final tax liability would be nil as per the proposed budget.

Under the current year's tax regime, however, the net taxable income would have been INR 5.1 lakhs (since standard deduction is currently Rs 40,000) and the tax would be calculated as follows –
5% of the taxable income exceeding INR 2.5 lakhs (till 5 lakhs) = 5% of 2.5 lakhs = INR 12,500
And 20% on the taxable income exceeding 5 lakhs = 20% of 10,000 = 2,000
Total tax liability would have been INR 14,500 + cess.

Example 2 – Gross annual income of INR 10 lakhs

Calculation of taxable income and tax would be as follows:

Gross annual income INR 10 lakhs
Less: Section 80C deductions (ELSS investments, PPF contributions,
life insurance premium, home loan principal repayment, etc.)
INR 1.5 lakhs
Less: Additional NPS Contribution INR 50,000
Less: Standard deduction (only if you are an employee, otherwise 0) INR 50,000
Net taxable income INR 7.5 lakhs
Rebate applicable No
Net tax liability (as per the proposed rules) For the first INR 2.5 lakhs: Nil
For the next INR 2.5 lakhs: 5% of 2.5 lakhs = INR 12,500
For the remaining INR 2.5 lakhs: 20% of 2.5 lakhs = INR 50,000
Total tax liability: INR 62,500 + cess

Since the net taxable income in this case is more than INR 5 lakhs, the rebate wont be applicable and the tax liability would be calculated as per the existing tax slabs.

However, note that tax liability for salaried tax payers would be slightly lower because of the additional standard deduction of INR 10,000 allowed as per the proposed changes. However, for self-employed individuals, there is NO change in the tax liability as the standard deduction does not apply to them.

Note: We have not considered exemption on HRA or exemption on home loan interest. Generally you would be able to lower your net taxable income further by availing of these.

Example 3 – Gross annual income of INR 15 lakhs

This income level would also not attract any tax rebate as the net taxable income would be more than INR 5 lakhs.

The taxable income and tax liability would be calculated as below:

Gross annual income INR 15 lakhs
Less: Section 80C deductions (ELSS investments, PPF contributions,
life insurance premium, home loan principal repayment, etc.)
INR 1.5 lakhs
Less: Additional NPS Contribution INR 50,000
Less: Standard deduction (only if you are an employee, otherwise 0) INR 50,000
Net taxable income INR 12.5 lakhs
Rebate applicable No
Net tax liability (as per the proposed rules) For the first 2.5 lakhs: Nil
For the next 2.5 lakhs: 5% of 2.5 lakhs = INR 12,500
For the next 5 lakhs: 20% of 5 lakhs = INR 1 lakh
For the remaining 2.5 lakhs: 30% of 2.5 lakhs = INR 75,000
Total tax liability: INR 187,500 + cess

Similar to the previous example, tax liabilities would be calculated using the existing slabs but salaried employees can enjoy a higher standard deduction which would slightly lower their tax outgo.

So, to sum up, if you have taxable income falling within the 5 lakh range, you can enjoy a full tax rebate and save yourself from paying tax.

For higher income earners, though, the budget has not provided any significant income tax relief apart from the extra 10,000 in standard deduction for salaried employees.