The one proposal in the budget which has evinced the maximum interest as well has initially created the maximum confusion till the dust settled down is the proposal to make income upto Rs 5 lakhs tax free in the hands of taxpayers. Let us discuss how it is proposed to be done.
What is the exact proposal?
The finance minister has not proposed to increase the basic limit from Rs 2.50 lakhs to Rs 5 lakhs for every individual tax payer but has increased the limits under existing provisions of Section 87A. Section 87A was introduced in Finance Act 2003. At present, an individual tax payer who is resident of India for income tax purpose is entitled to claim tax rebate upto Rs 2,500 against his tax liability if his total income does not exceed Rs 3.5 lakhs. You are entitled to avail rebate upto Rs 2,500 against your tax liability if your total income does not exceed the threshold limit of Rs 3.5 lakhs. However, your entitlement to claim a rebate under Section 87A gets lost altogether once the income exceeds this limit. Anybody and everybody are not entitled to avail this rebate. Though the basic exemption limit of Rs 2.5 lakhs is applicable to all individuals and HUFs, only individuals, resident for income tax purpose, are entitled to claim this rebate. HUFs and non resident individuals are not entitled. The FM has proposed to enhance the amount of rebate as well as the eligibility criteria in the budget. So instead of a rebate, of upto Rs 2,500, now the rebate is Rs 12,500. Likewise, individuals whose income does not exceed Rs 5 lakhs will be entitled to avail this expanded rebate instead of erstwhile lower threshold limit.
Which income is to be taken into account?
There has always been a confusion on which income should be considered for the purpose of this eligibility criteria. It is the income on which your ultimate tax liability is computed. So the income to be considered for this purpose is the income arrived at after setting off all the brought forward old losses which you are entitled to set off against the income of current year. Likewise, you also have to reduce the total income from all the sources after setting of the losses under the respective head by the amount of deduction available under various sections of Chapter VIA. Chapter VIA provides for reducing your income by deduction under various sections like 80C (For LIP, EPF, PPF, ELSS, tuition fee, home loan repayment etc.), Section 80 CCD (NPS), Section 80 D (Health Insurance), 80 G (donations) and 80 TTA and 80TTB (Bank interest)
Against which tax liability this rebate can be adjusted?
It is not that the rebate of 12,500 available under Section 87A can be claimed against all the tax liability which you may have. This rebate can be claimed against your tax liability in respect of normal income taxed at the slab rate, long term capital gains under Section 112 in respect of profits on sale of capital assets other than listed equity shares as well as equity oriented schemes of mutual funds and short term capital gains listed equity shares as well as equity oriented schemes of mutual funds under Section 111A payable at 15 per cent. However, you are not entitled to set of your tax liability in respect of long term capital gains arising on sale of listed equity shares as well as equity oriented schemes of mutual funds which is payable at 10 per cent on the long term capital gains in excess of initial exemption of Rs 1 lakh against this rebate.
Once the income crosses the magical number of Rs 5 lakhs, the tax payer is burdened with a tax liability of 12500 even if the incremental income is only a few hundred which is unjust. There are provisions of marginal relief in cases where for the tax payers whose income exceeds Rs 50 lakhs and who are subjected to surcharge on the income tax for the entire amount. The provisions of marginal relief provide that in no circumstances the incremental tax shall exceed the amount of income which exceeds the threshold limit for surcharge. Similar provisions need to be added to the existing provision of Section 87A.
The autor is a tax and investment expert and can be reached on firstname.lastname@example.org