Income Tax Rebate explained with Example
On 1st Feb, our Finance Minister Mr. Piyush Goyal presented an interim budget for 2019-20. In the budget presented by him, he proposed to grant full tax rebate on Taxable Income up to Rs. 5,00,000. The said amendment is proposed to take effect from FY 2019-20.
Let us understand the interpretation and impact of the said amendment.
It is a rebate and not exemption!!
First and foremost thing to understand that it is a rebate i.e. concession from tax. Basic exemption limit is NOT increased to Rs. 5,00,000. When basic exemption limit is increased, persons having income below exemption limit are exempted from filing of IT Return. Rebate provides a partial concession from tax payable amount. It does not exempt a person from filing of IT Return.
No Change in the Basic Exemption Limit
As stated earlier, there is no change in the current tax slabs or tax rates. Therefore, income in FY 2019-20 is taxable in the same manner as FY 2018-19.
For the taxpayers below 60 years of age-
| Income Slab | Tax Rates | |
| FY 2018-19 | FY 2019-20 | |
| Up to Rs. 2,50,000 | 0% | 0% |
| Rs. 2,50,001 to Rs. 5,00,000 | 5% | 5% |
| Rs. 5,00,001 to Rs. 10,00,001 | 20% | 20% |
| Above Rs. 10,00,000 | 30% | 30% |
For the taxpayers between 60 years to 80 years-
| Income Slab | Tax Rates | |
| FY 2018-19 | FY 2019-20 | |
| Up to Rs. 3,00,000 | 0% | 0% |
| Rs. 3,00,001 to Rs. 5,00,000 | 5% | 5% |
| Rs. 5,00,001 to Rs. 10,00,001 | 20% | 20% |
| Above Rs. 10,00,000 | 30% | 30% |
It is a Rebate under Section 87A. What is it?
Section 87A of Income Tax Act provides for a tax rebate upto Rs. 2,500 is available for the taxpayers having taxable income of Rs. 3,50,000 or less. Today, Finance Minister proposed to increase the said income limit of Rs. 3,50,000 to Rs. 5,00,000. He proposed to grant full tax rebate on net taxable income up to Rs. 5,00,000. It means that no tax shall be payable if the taxable income is Rs. 5,00,000 or less.
This provision under section 87A can be availed only by RESIDENT INDIVIDUAL TAXPAYERS. HUFs having taxable income up to Rs. 5,00,000 should pay tax as per normal tax slabs. Here is the comparison of the existing tax rebate and proposed amendment.
| Particulars | Tax Rate | Reference | FY 2018-19 | FY 2019-20 | FY 2018-19 | FY 2019-20 |
| Net Taxable Income after deductions | A | Rs. 5,00,000 | Rs. 5,00,000 | Rs. 3,50,000 | Rs. 3,50,000 | |
| Tax Payable | ||||||
| (i) Up to Rs. 2,50,000 | 0% | B(i) + B(ii) | Nil | Nil | Nil | Nil |
| (ii) Rs. 2,50,000 – Rs. 5,00,000 | 5% | Rs. 12,500 | Rs. 12,500 | Rs. 5,000 | Rs. 5,000 | |
| Total Tax Payable | B = B(i) + B(ii) | Rs. 12,500 | Rs. 12,500 | Rs. 5,000 | Rs. 5,000 | |
| Less: Rebate under section 87A | C | Nil | (Rs. 12,500) | (Rs. 2,500) | (Rs. 5,000) | |
| Tax Payable after Rebate | D = B – C | Rs. 12,500 | Nil | Rs. 2,500 | Nil |
As we can see in the above example,
Here as you can see, For FY 2018-19, rebate is available only up to taxable income of Rs. 3,50,000 therefore for income of Rs. 5,00,000 taxpayer has to pay tax as per normal tax slabs. From FY 2019-20, it is proposed to grant full rebate upto Rs. 12,500, for net taxable income up to Rs. 5,00,000. Similarly, in FY 2018-19, rebate was allowed only up to Rs. 2,500 therefore, even if the taxable income is Rs. 3,50,000, taxpayer had to pay tax of Rs. 2,500 on the income. In FY 2019-20, considering the proposed amendments, no tax payment would be required in the said situation.
No exemption from filing of Income Tax Return
As discussed earlier, it is not increase in the basic exemption limit, therefore taxpayers are not exempted from filing of income tax return. Rebate can be claimed only if the income tax return is filed. Therefore, for the taxpayers whose Gross Total income (i.e. income before claiming deductions under section 80C to 80U) is more than the basic exemption limit (i.e. Rs. 2,50,000 or Rs. 3,00,000 as the case may be), must file their income tax return on or before due date (i.e. before 31st July)
What is meant by Net Taxable Income?
Net Taxable Income is the income on which the actual tax is calculated. Income earned by a taxpayer is divided into 5 major heads
- 1. Income from Salary
- 2. Income from House Property
- 3. Income from Capital Gain
- 4. Income from Business or Profession
- 5. Income from Other Sources
Therefore, income earned from all these sources form a ‘Gross Total Income’. Taxpayer can claim deductions under section 80C to 80U from the Gross Total Income.Net Taxable Income is the income arrived after deducting the Deductions from Section 80C to 80U.
Deductions that will reduce your tax burden
Standard Deduction on Income from Salary / Pension.
In case of salaried taxpayer or pensioner, a flat deduction of Rs. 50,000 has been proposed. This deduction will be deducted directly from your salary. It means this deduction shall be considered in your Form 16 and taxable salary as per form 16 shall be net of this standard deduction of Rs. 50,000.
Interest on Housing Loan – Section 24(b)
If you have a taken a housing loan and paying interest, then you can claim deduction up to Rs. 2,00,000 under section 24(b). This will be considered as your negative income from house property. It means, your gross total income shall be calculated after deducting the above two expenses.
Deduction under Section 80C
Deduction up to Rs. 1,50,000 can be claimed under this section. Investments in PPF, EPF, Life Insurance, ELSS, Sukanya Samriddhi, Tax Saver FD, SCSS, Housing Loan Principle, Contribution to NPS under section 80CCD(1). Are eligible for deduction under section 80C.
Section 80CCD (1B) Additional Contribution In National Pension Scheme (NPS)
This section provides a deduction up to Rs. 50,000 over and above the limit of Section 80C (Rs. 1,50,000). Investment under this section is open for self employed taxpayers as well. In short, both salaried employees as well as self employed taxpayers can avail deduction up to Rs. 50,000 under this section. Apart from the above, here are some popularly known tax deductions. So, collectively the above four expenses / investments help you to reduce your taxable income up to Rs. 4,00,000.
| Particulars | Salaried Taxpayer | Self Employed Taxpayer |
| Standard Deduction | Rs. 50,000 | Nil |
| Interest on Housing Loan | Rs. 2,00,000 | Rs. 2,00,000 |
| Investments eligible for deduction under section 80C | Rs. 1,50,000 | Rs. 1,50,000 |
| Additional contribution to NPS | Rs. 50,000 | Rs. 50,000 |
| Total reduction in Taxable Tncome | Rs. 4,50,000 | Rs. 4,00,000 |
Here we can see, the above 4 deductions reduce the taxable income by Rs. 4,00,000 to Rs. 4,50,000.
It means, If the investments are planned smartly, even a taxpayer earning Gross Income of Rs. 9,00,000 to Rs. 9,50,000 (before claiming these deductions) can be relived from the tax burden. Because after claiming the above deductions his taxable income shall reduce to Rs. 5,00,000 or less, which is not taxable as per proposed amendments. Apart from the above, there are few more options which will help you to reduce your taxable income.
Section 80D – Health Insurance Premium
A taxpayer below 60 years can claim deduction up to Rs. 25,000 on payment of Health Insurance and Preventive Health Checkup. A taxpayer above 60 years can claim deduction up to Rs. 50,000 on payment of Health Insurance and Preventive Health Checkup. Similar deductions are available for the payment of premium on behalf of parents. Deduction in case of parents is in addition to the deduction claimed for yourself. It means, if you have paid Premium of Rs. 25,000 for yourself and Premium of Rs. 50,000 for your senior citizen parents, then you may get a total deduction of Rs. 75,000
Section 80TTA – Deduction on SB Interest
This section is only for taxpayers below 60 years of age. Deduction up to Rs. 10,000 is available for SB Interest earned during the year. It means if interest of Rs. 12,000 is earned on savings in banks, then Rs. 10,000 can be claimed as deduction under section 80TTA and only Rs. 2,000 shall be taxable. If SB Interest is less than Rs. 10,000 then entire amount of SB Interest shall be claimed as deduction under section 80TTA.
Section 80TTB – Deduction on SB Interest
This section is only for taxpayers of age 60 years and above. Deduction up to Rs. 50,000 is available for SB/FD and RD Interest earned during the year. If total of SB + FD + RD interest is less than Rs. 50,000, then entire interest can be claimed as deduction under section 80TTB. Now, suppose, the total of SB + FD + RD interest is Rs. 55,000 then, deduction of Rs. 50,000 shall be claimed and balance amount of Rs. 5,000 shall be taxable.
What about HRA and LTA Exemption?
Now, HRA and LTA are your salary components. To claim HRA Exemption, one needs to submit his rent paid receipts. To claim LTA exemption, one needs to submit his bills of domestic travel to the employer. After considering your expenses, employer shall avail the exemption from HRA and LTA. The exempt amount shall be reduced from taxable salary of the employee. Standard deduction is also reduced from the taxable salary however, submission of bills is not necessary in case of standard deductions. Let understand how the taxable salary is calculated
Mr. Guru is a salaried employee. The salary components are given below-
| Particulars | Gross Amount | Exemptions (as calculated by employer on submission of bills) |
| Basic Salary | Rs. 3,00,000 | – |
| HRA | Rs. 2,40,000 | Rs. 1,80,000 |
| Leave Travel Allowance | Rs. 1,00,000 | Rs. 60,000 |
| Performance Incentive | Rs. 60,000 | – |
| Total Salary | Rs. 7,00,000 | – |
Now, taxable salary shall be calculated as –
| Particulars | Reference | Amount |
| Basic Salary | A | Rs. 3,00,000 |
| House Rent Allowance | B = Rs. 2,40,000 Less Rs. 1,80,000 | Rs. 2,40,000 |
| Leave Travel Allowance | C = Rs. 1,00,000 Less Rs. 60,000 | Rs. ,100,000 |
| Performance Incentive | D | Rs. 2, 60,000 |
| Gross Salary | E = (A +B +C + D) | Rs. 9,00,000 |
| Less: Exemptions | ||
| HRA | F | (Rs. 1,80,000) |
| Leave Travel Allowance | G | (Rs. 60,000) |
| Standard Deduction | H | (Rs. 50,000) |
| Total Exemptions | I = (F + G + H) | Rs. 2,90,000 |
| Professional Tax | J | Rs. 2,500 |
| Taxable Salary | K = (E – I – J) Rs. 9,00,000 – Rs. 2,90,000 – Rs. 2,500 | Rs. 6,07,500 |
Example showing the impact of this proposed amendment
How the impact of this amendment will affect taxpayers under different tax slabs? Let us understand with the help of example. We will take three situations. Income details are given below-
| Particulars | Reference | Case I | Case II | Case III |
| Salary before standard deduction | A | Rs. 9,00,000 | Rs. 10,00,000 | Rs. 20,00,000 |
| Less: Standard Deduction | B | (Rs. 50,000) | (Rs. 50,000) | (Rs. 50,000) |
| Taxable Income from salary | C = A-B | Rs. 8,50,000 | Rs. 9,50,000 | Rs. 19,50,000 |
| Interest paid on Housing Loan | D | (Rs. 2,00,000) | (Rs. 2,00,000) | (Rs. 2,00,000) |
| Gross Total Income | E = C-D | Rs. 6,50,000 | Rs. 7,50,000 | Rs. 17,50,000 |
| Less: Deductions under section 80C to 80U | ||||
| Investment in PF / PPF / ELSS | (i) | (Rs. 1,50,000) | (Rs. 1,50,00) | (Rs. 1,50,00) |
| Investment in NPS – Section 80CCD (1B) | (ii) | (Rs. 50,000) | (Rs. 50,000) | (Rs. 50,000) |
| Total Deductions | F = (i) + (ii) | (Rs. 2,00,000) | (Rs. 2,00,000) | (Rs. 2,00,000) |
| Net Taxable Income | G = E – F | Rs. 4,50,000 | Rs. 5,50,000 | Rs. 15,50,000 |
Tax on the above income shall be calculated as
| Particulars | Reference | Case I | Case II | Case III |
| Net Taxable Income | Rs. 4,50,000 | Rs. 5,50,000 | Rs. 15,50,000 | |
| Tax Payable | ||||
| Upto Rs. 2,50,000 | A(i) | 0 | 0 | 0 |
| Rs. 2,50,001 to Rs. 5,00,000 | A(ii) | Rs. 10,000 | Rs. 12,500 | Rs. 12,500 |
| Rs. 5,00,001 to Rs. 10,00,000 | A(iii) | Rs. 0 | Rs. 10,000 | Rs. 1,00,000 |
| Above Rs. 10,00,000 | A(iv) | Rs. 0 | Rs. 0 | Rs. 1,65,000 |
| Total tax payable | A = A(i) +A(ii) +A(iii) + A(iv) | Rs. 10,000 | Rs. 22,500 | Rs. 2,77,500 |
| Les: Rebate under section 87A | B | (Rs. 10,000) | Rs. 0 | Rs. 0 |
| Tax payable after rebate | C = A-B | Rs. 0 | Rs. 22,500 | Rs. 2,77,500 |
| Add: Health and Education cess | D | Rs. 0 | Rs. 900 | Rs. 11,100 |
| Total Tax Payable | E = C+D | Rs. 0 | Rs. 23,400 | Rs. 2,88,600 |
As we can see above, If the taxable income is Rs. 5,00,000 or less then full tax rebate can be availed. However, if the income is more than Rs. 5,00,000 then tax is payable at normal tax rates.