The announcement made by the Finance Minister (FM) of no tax liability for income upto Rs. 5 lakhs created euphoria initially. This most beneficial proposal in the budget evinced the maximum interest and as well as also created maximum amount of confusion in the minds of taxpayers till the dust settled down on the proposal and people realised that this bonanza is available only for the taxpayers whose income does not exceed Rs. 5 lakhs only and not for all the tax payers. Let us discuss how the finance minister proposes to do this.
How will it work?
From the later discussions in the media it has drawn on the tax payers that the FM does not propose to increase the basic limit from existing Rs. 2.50 lakhs to Rs. 5 lakhs for every individual tax payer but is proposing to ensure exemption of income upto Rs. 5 lakhs by increasing the limits under existing provisions of Section 87A. As per present Section 87A an individual is entitled to tax rebate upto Rs. 2,500/- if his total income does not exceed Rs. 3.50 lakhs. This rebate is available only for the individual tax payer who is resident of India for income tax purpose. So at present you are entitled to avail rebate upto Rs. 2,500/- against your tax liability provided your total income does not exceed the threshold limit of Rs. 3.50 lakhs for the year. So anybody and everybody is not entitled to avail this rebate. Though the basic exemption limit of Rs. 2.50 lakhs is applicable for all Individuals and HUFs and generally various other provisions of the Income Tax Act like Deduction under Section 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 provisions is also not applicable for all the Individuals but only for the individuals 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 upto 5 lakhs what the FM has proposed is that he has just increased 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 upto Rs. 2,500/- available hitherto, the rebate will be available upto Rs. 12,500/-. Likewise now all resident Individuals whose income does not exceed Rs. 5 lakhs will be entitled to avail this expanded rebate in stead of the present 3.50 lakhs presently.
Once the income cross the magical number of five lakhs, the tax payer is burdened with a tax liability of 12,500/- even if the incremental income is only a few hundreds which is unjust to say the least and will induce tax payers to use ingenious means to bring it under 5 lakhs rupees. There are provisions of marginal relief 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 provides that in no circumstances the incremental tax shall exceed the amount of income which exceeds the threshold limit for surcharge. A similar provisions needs to be added to the existing provision of Section 87A.
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