Although
the interim budget 2019 has made income up to Rs 5 lakh tax free, the
marginal increase in income above Rs 5 lakh will result in more tax
outgo than the incremental increase in income, says Sonu Iyer, Leader
and Tax Partner, People Advisory Services, EY India. She was speaking at
the ET
Wealth Investment Workshop held at Delhi on February 15.
This
was explained by Iyer with an example. Taxpayers whose income does not
exceed Rs 5 lakh will not be liable to pay any tax as per the proposed
rebate in the Budget 2019. However, taxpayers whose income exceeds Rs 5
lakh by a marginal amount, say Rs 10,000, will end up paying more tax
than the increase in income.
Issue in tax rebate
| Particulars | Proposed taxable income – 1 (Rs) | Proposed taxable income – 2 (Rs) |
| Taxable income | 5,00,000 | 5,10,000 |
| Income-tax | 12,500 | 14,500 |
| Less: Tax rebate | 12,500 | Nil |
| Income-tax payable | Nil | 14,500 |
| Health and education cess | Nil | 580 |
| Total tax payable | Nil | 15,080 |
| Additional tax payable | | 15,080 |
Marginal increase in the income above INR 500,000 will result in more tax than incremental incomeSource: EY India
It
can be seen from the table above that for a taxpayer whose taxable
income (after claiming all the eligible deductions and tax exemptions)
comes to Rs 5, 10,000 will have tax liability of Rs 15,080 (inclusive of
cess at 4 per cent).
Here the tax liability is more than the
incremental increase in income. The taxable income has increased by Rs
10,000, whereas the tax liability is Rs 15,080 which is higher by Rs
5,080.
Iyer further pointed out that marginal relief is available
where surcharges are levied, i.e., surcharge of 10 per cent for income
between Rs 50 lakh and 1 crore and 15 per cent surcharge for income
exceeding Rs 1 crore. Current income tax laws say that the incremental
tax cannot be more than the increase in income. However, going by the
proposed budget changes, there is disconnect regarding the marginal
relief for small taxpayers.
Explaining the budget proposals to the
audience, Iyer said that every class of salaried taxpayer will be
benefited by the proposed increase in standard deduction. Remember
Finance Minister Piyush Goyal in his budget speech has proposed to
increase the standard deduction limit to Rs 50,000 from current Rs
40,000, a hike of Rs 10,000.
As per the proposals, a hike in standard deduction along with tax rebate will lead to the following tax relief:
| Total taxable income (Rs) | Tax relief (Rs) |
| 250,001 to 500,000 | Up to INR 13,000* |
| 500,001 to 1,000,000 | 2,080** |
| 1,000,001 to 5,000,000 | 3,120** |
| 5,000,001 to 10,000,000 | 3,432** |
| 10,000,001 and above | 3,588** |
*Relief for taxpayer with total taxable income in range of INR 250,001 – 500,000 will vary
**For
salaried individuals whose taxable income exceeds INR 500,000, the tax
relief is only due to proposed increase in standard deduction
Source: EY India
Finance Minister Piyush Goyal has proposed to increase the standard deduction limit to Rs 50,000.