The Budget announcement of no tax liability for income up to Rs 5 lakh created euphoria initially, till people realised that this bonanza is available only for taxpayers whose income does not exceed Rs 5 lakh and not for all taxpayers. Let us understand this in detail.
What is the proposal
There is no increase in the basic limit from existing Rs 2.50 lakh to Rs 5 lakh for every individual taxpayer. But limits under existing provisions of Section 87A have been increased to Rs 5 lakh. Currently, under Section 87A, an individual is entitled to tax rebate up to Rs 2,500 if his total income does not exceed Rs 3.50 lakh. This rebate is available only for the individual tax payer who is resident of India for income tax purpose. So anybody and everybody is not entitled to avail this rebate.
The basic exemption limit of Rs 2.50 lakh is applicable for all individuals and Hindu Undivided Families (HUF) and generally various other provisions of the Income Tax Act like deduction under Sections 80C, 80D, etc, apply to individual and HUF both. But the provisions of Section 87A are applicable to only individuals and not to HUFs. This provision is also not applicable for all individuals but only for those who are resident for income tax purpose, which is determined on the basis of your stay in India during the previous year.
So in order to make income exempt up to Rs 5 lakh what the FM has proposed to increase the amount of rebate available as well as the eligibility criteria under Section 87A for this purpose. So as per the proposal, instead of a rebate up to Rs 2,500 available hitherto, the rebate will be available up to Rs 12,500. Likewise, now all resident individuals whose income does not exceed Rs 5 lakh will be entitled to avail this expanded rebate instead of the present Rs 3.50 lakh.
Once the income crosses Rs 5 lakh, the taxpayer is burdened with a tax liability of 12,500 even if the incremental income is only a few hundreds. This is unjust, to say the least and will induce taxpayers to use ingenious means to bring their income under Rs 5 lakh. There are provisions of marginal relief for taxpayers whose income exceeds Rs 50 lakh and who are subjected to surcharge on the income tax for the entire amount. The provision of marginal relief provides that in no circumstances the incremental tax shall exceed the amount of income which exceeds the threshold limit for surcharge. A similar provision needs to be added to the existing provision of Section 87A.
Income relevant for eligibility
The tax rebate eligibility is to be determined with reference to the income which is considered for computing the amount of tax payable. Income for Section 87A means the net income which is arrived at after you have set off all your eligible brought forward old losses, which you are entitled to set off against the income of current year. Moreover, this net adjusted income has to be further reduced by amount of deductions available under various sections of Chapter VIA like Section 80C (For life insurance policy, EPF, PPF, ELSS, tuition fee, home loan repayment, etc), Section 80 CCD (NPS) under Section80 D (Health Insurance), 80 G (donations) and 80 TTA and 80TTB (bank interest), etc.
Taxes that can be adjusted against the rebate
The rebate of Rs 12,500 is virtually a tax credit in your hand, which you can adjust against your tax liability. However, it is not available against all of your tax liabilities. It can be adjusted against tax payable on your normal income which is taxed at the slab rate. You can also adjust this rebate against tax payable for long-term capital gains (LTCG) under Section 112 on sale of capital assets (other than listed equity shares and equity-oriented schemes of mutual funds) and any short-term capital gains liability for listed equity shares and equity oriented schemes of MFs payable @ 15% under Section 111A. It is interesting to note that you cannot adjust your tax liability for LTCG on listed equity shares and equity-oriented schemes of MFs (which is charged @ 10% on the profits in excess of initial exemption of Rs 1 lakh) against this rebate)