How is Income up to ₹5 Lakhs tax-free in Budget 2019?

Finance Minister Sh. Piyush Goyal presented the 6th and Interim Budget in Lok Sabha on 1st February 2019. The budget had brought forward a large number of positive measures for all sections of the economy, including MSMEs, startups and corporate sector. Besides, MSMEs with GST registration will 2% interest subvention on up to ₹1 crore loans.

However, the most fascinating update in this budget is that Taxpayers with annual income up to ₹5 lakhs shall pay no income tax in this financial year. Many people have misunderstood this as the increase of income tax slab rate from ₹2.5 lakh to ₹5 lakh. But, what is the truth?

GST registration

Let us try to understand it here.

#1. Why there is no income tax on income up to ₹5 lakhs?

  • One important aspect that should be clearly understood here is that the government has given a tax rebate rather than giving clear cut exemption on income tax of up to ₹5,00,000.
  • The government has slightly changed the circumstance by increasing the Rebate under section 87A of the Income Tax Act 1961.
  • The Finance Minister while giving speech at the Budget Session 2019 has expressed very clearly that there won’t be any Income Tax charged on the Income up to ₹5 lakh.
  • Now, in the Finance Bill 2019, it has been clearly explained how the annual income up to ₹5 lakhs is totally tax free.

#2. What is there in the section 87A of the Income Tax Act 1961?

  • The Clause 8 of the Finance Bill 2019 tells us that a revision has been made to the section 87A of the Income Tax Act 1961.
  • With that the individual taxpayers have been further given relief by raising the greatest amount of tax rebate to ₹12,500 from the existing ₹2,500. This tax rebate will currently be allowed to the taxpayers having annual income up to ₹5,00,000 rather than the existing ₹3,50,000.

#3. How can this be understood?

The above situation can be well understood with 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 aforementioned Case Studies, we can now make out that-

  • The government has not raised the income tax slab rates. It has now increased the amount of tax rebate that was given u/s 87A of the Income Tax Act 1961.
  • The taxpayer with income up to ₹5 lakh can easily avail this rebate u/s 87A while doing his income tax return filing. Since, such taxpayer will already be paying income tax of ₹12,500 (5% of 2,50,000), on which he will avail a tax rebate of ₹12,500, hence he will pay no tax on income up to ₹5 lakh (12,500 -12,500 = 0).
  • As there is no change in income tax slab rates, if now income exceeds ₹5 lakh, the tax assessee can no longer claim this tax rebate u/s 87A while income tax return filing. Such an assessee will definitely need to pay income tax on income above ₹ 2.5 lakhs.

#5. What are other business friendly measures in the Budget?

The Budget indeed contains many business friendly measures that are discussed below-

  • MSMEs having GST registration will be able to avail 2% interest subvention on the business loans of up to ₹1 crore.
  • Individuals having gross annual income up to ₹6.5 lakh need not pay any income tax if they make investments in provident funds and prescribed equities u/s 80c of Income Tax Act 1961.
  • Direct Tax Rate for the companies have turnover above ₹250 crore has been decided to be kept at 25%.
Close