There have been two important changes that will reduce the tax outgo for the common man.
One, standard deduction has been raised for salaried persons from ₹40,000 currently to ₹50,000 a year. This increase of ₹10,000 in the standard deduction will help all salaried taxpayers, including pensioners. It will mean less tax (including cess) of ₹520 for those in the 5 per cent tax slab, ₹2,080 for those in the 20 per cent tax slab and ₹3,120 for those in the 30 per cent tax slab.
Next, individual taxpayers having annual taxable income of up to ₹5 lakh will get full tax rebate and will not have to pay any income tax. This translates into lower tax (including cess) of up to ₹13,000 for those with taxable income up to ₹5 lakh. Note that the rates of tax have not changed — it remains 5 per cent on incomes between ₹2.5 lakh and ₹5 lakh.
The taxpayer has to calculate his tax liability and then claim the rebate under Section 87A. At present, a rebate of ₹2,500 is allowed for those with taxable income up to ₹3.5 lakh. Budget 2019 has increased both the eligibility to claim the rebate amount (taxable income up to ₹5 lakh) and also the rebate amount (up to ₹12,500).
It is pertinent that this rebate benefit under Budget 2019 will not apply to those whose taxable income exceeds ₹5 lakh. So, for instance, if taxable income is ₹6 lakh, there is no rebate on income up to ₹5 lakh. The tax liability has to be calculated, without rebate benefit, on the entire ₹6 lakh as per the tax slabs — nil up to ₹2.5 lakh, 5 per cent on income between ₹2.5 lakh and ₹5 lakh, and 20 per cent for income between ₹5 lakh and ₹10 lakh.
How can taxpayers with earnings higher than ₹5 lakh get the rebate benefit and avoid paying tax?
To the extent possible, they can make investments and incur expenses that give tax breaks and try to bring their taxable income to ₹5 lakh or below.
For instance, say, a taxpayer’s gross income after revised standard deduction of ₹50,000 is ₹7.5 lakh. If he invests ₹1.5 lakh in Section 80C instruments, ₹50,000 in the National Pension Scheme (NPS) and pays health insurance premium of ₹25,000 for himself and ₹25,000 for his parents, the taxable income comes down to ₹5 lakh. He then becomes eligible for the rebate benefit under Budget 2019 and ends up paying no tax.
Other expenses that can reduce taxable income include interest on home loan (up to ₹2 lakh) and interest on education loans.
With the Lok Sabha election approaching, there was speculation and hope that the Budget, despite being an interim one, will provide some big tax breaks to individual taxpayers. For instance, higher income exemption limit (from ₹2.5 lakh currently to ₹3 lakh or more), higher deduction limit under Section 80C (₹1.5 lakh currently to ₹2 lakh or more) and higher tax deduction on home loan interest (from ₹2 lakh currently to ₹2.5 lakh or more).
The last major tax benefits across the board were given way back in Budget 2014 with only tweaks here and there in the next four Budgets. There has been an attempt to provide some sweeteners to the middle-class but the tax breaks are far fewer than expected.
Something’s better than nothing.