Tax 2019

Budget 2019: The Tax Deduction for Rs 5 Lakh Earners Is Large Tax Planning Incentive for Middle-Income Group

The Budget has reduced the tax burden on small taxpayers by giving a full tax rebate to those earning up to Rs five lakh a year. But even those with higher income will not had the burden of tax .net, if they claim tax deductions under various sections. “Even persons having a gross income up to Rs 6.5 lakh may not be needed to pay any tax if they make investments accordingly,” Interim minister of finance Piyush Goyal said in his Budget speech. For example, somebody earning Rs seven lakh can be tax-free if he invest 1.5 lakh u/s 80C and 0.50 lakh in NPS u/s 80CCD (IB).

The rebate enhances the existing benefit under Section 87A. Till now, those earning up to Rs 3.5 lakh a year were eligible for a tax rebate of Rs 2,500. This year’s proposal has hiked this to Rs 12,500 and raised the eligibility to Rs 5 lakh. Though high-income earners will not be affected by the rebate, taxpayers in the lower income group will save up to Rs 13,000 in tax from the proposal.

How much tax can you save?

The only benefit for high-income earners is Rs 10,000 hike in the standard deduction to Rs 50,000. This will bring down the annual tax of salaried taxpayers by a negligible amount of Rs 3,000. Experts have welcomed this move as the impact of the standard deduction was curtailed last year by the removal of tax exemption to transport allowance and medical reimbursements.

Focus on tax planning

The Budget proposals are likely to put greater stress on tax planning. Taxpayers who are very close to the threshold limit will have to ensure that their income does not exceed Rs 5 lakh. Right now, anybody with an annual taxable income of up to Rs 3.5 lakh is eligible for a tax rebate of Rs 2,500 under Section 87A. But that rebate vanishes if the income exceeds Rs 3.5 lakh by even one rupee.

Many taxpayers are also not aware that interest from fixed deposits, bonds, and certain little savings schemes is totally taxable. It’s added to the income of the taxpayer and taxed at the normal rate. Such taxpayers might skip declaring this income in their come back and claim the rebate. However, they might be in shock, if the addition of this interest takes their total income above the Rs 5 lakh threshold and makes them ineligible for the rebate.

Experts say the Budget proposals will encourage taxpayers to save aggressively in tax saving choices. For instance, the NPS benefit under Section 80CCD (2) can reduce the taxable income significantly. Under this, up to 100 pc of the basic pay of the employee put in the NPS by the employer is tax deductible. It is also believed that the Budget will make tax compliance easier for taxpayers.

Experts say the Budget proposals will encourage taxpayers to save aggressively in tax saving choices. for instance, the NPS benefit under Section 80CCD(2) can reduce the taxable income significantly. Under this, up to 100 pc of the basic pay of the employee put in the NPS by the employer is tax deductible. It is also believed that the Budget will make tax compliance easier for taxpayers.