Budget 2019: The Catch Behind Rs 5 Lakh Tax Free Income

Budget 2019- Rupees 5 Lkahs Income Tax Free - Image

Why I say that there is a catch behind Rs 5 lakh tax free income? Because everyone is not going to get the advantage of it uniformly. Why? Because the tax slabs have remain unchanged. What was the tax slab?

Budget 2019- Rupees 5 Lkahs Income Tax Free - Tax Slab3

What does it mean? The minimum tax exemption limit of Rs.2.5 lakhs has “not” increased. But still, people with net taxable income upto Rs 5 lakhs will get the tax benefit. How?

We will see it in details later. But for the moment let’s see an interesting aspect that has emerged post Budget 2019.

An individual whose net taxable income is Rs.5,00,000 or below, will pay zero tax.

But an individual whose net taxable income is Rs.5,00,001 will pay a tax of Rs.12,500.

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It means, even if ones net taxable income increases even by Rs.1, above Rupees five lakhs, will have to pay the full income tax as per the tax slab.

What does it mean for the taxpayers?

For people whose net taxable income is Rs 5 lakh or below will benefit fully from the budget 2019. But for individuals whose net taxable income is higher than Rs 5 lakhs, will get no benefit.

Let’s dig deeper into the income tax slabs to understand more…

If tax slabs remain unchanged, how there is a tax benefit?

In 2019 budget speech in parliament, the finance minister stated that the tax slabs remain unchanged.

Inspite of this fact, he announced that people with taxable income of Rs 5 lakhs and below will pay no tax. How this is possible?

This has been made possible by a change in section 87A of the income tax act. What is 87A? Let’s see the revised section 87A compared to that of 2018:

Budget 2019- Rupees 5 Lkahs Income Tax Free - 87A Before After

What does section 87A talks about?

In year 2018: If ones taxable income is Rs 3.5 lakhs or below, tax rebate of Rs.2,500 is applicable u/s 87A.

In year 2019: If ones taxable income is Rs 5 lakhs or below, rebate of Rs.12,500 is applicable u/s 87A.

This what is making all the difference in the changes proposed in budget 2019. Let me make the matter clearer by giving an example.

What is important for us to understand is that, how the tax rebate under section 87A is applied. This will become clear with this example…

Example:

Suppose there is a person whose net taxable income is say Rs.5,00,000 in FY 2019-20. How his tax will be computed under the changes proposed in Budget’2019?

Please refer the below infographics for a general calculation:

Budget 2019- Rupees 5 Lkahs Income Tax Free - Tax Slab

Conclusion…

The tax slab remains unchanged. It means, the zero percent (0%) tax slab for income below Rs 2.5 lakhs is still applicable.

Do not think that 0% tax is applicable for taxable income upto Rs 5 lakhs.

Budget 2019- Rupees 5 Lkahs Income Tax Free - Minimum Exemption 2.5 lakhs

The budget 2019 has brought a tax bonanza only for individuals whose taxable income is below Rs 5 lakhs.

What is there for individuals whose taxable salaried income is above Rs 5 lakhs? They get only a mediocre tax relief due to hike in standard deduction from Rs.40,000 to Rs.50,000 (see above infographics in example for the working).

So what is the key takeaway from the Budget 2019?

People who are close to (but above) the net taxable limit of Rs 5 lakhs, should start investing more on tax savings schemes. Idea should be to bring the “net taxable income” below Rs 5 lakhs.

Budget 2019 is all about planning and managing ones net taxable income (for salaried class people).

Have a happy investing.


Hi. I’m Mani, I’m an Engineering graduate who in pursuit of financial independence, has converted into a full time blogger. After working in the corporate world for almost 16+ years, I bid it adieu....read more

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Disclaimer: None of the articles, products etc should not be treated as investment advice. All types of content provided here are for casual reference and for informational purposes only. It should not be considered financial advice. You should consult with your professional expert before application of any information provided here.

1 Comment

  1. Very well explained article with examples and easy to understand. A clear explanation about no income tax on individuals with taxable income up to Rs. 5 lakh.

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