An exemption is a total waiver from paying any tax. So, we will further explain in detail what is rebate. A rebate is just a concession, which means you get concession on your tax liability. For availing benefits of the rebate, you need to have a net taxable income of Rs 5 lakh or less than that.
Understand the legislative part
First let us explain that a rebate is given under Section 87A of the Income Tax Act, 1961. So, the Finance Bill 2019 will seek to amend this provision. Earlier, the rebate was Rs 2,500 and the income on which it was given was Rs 3.5 lakh. So, a taxpayer with net taxable income of Rs 3.5 lakh was eligible for a rebate of Rs 2,500.
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The interim budget has increased the rebate amount to Rs 12,500. It has also increased the income limit up to Rs 5 lakh. For, implementing the new rebate government will have to make amendment to the said section.
How you will know the rebate
Let’s start with the income for which rebate has been declared. It is Rs 5 lakh per annum. In the budget finance minister Piyush Goyal declared a “full rebate” for individuals with Rs 5 lakh net income. At present, there is a tax rate of 5% on an income of Rs 2,50,001 to Rs 5 lakh.
Budget 2014 exempted the first Rs 2.5 lakh from any tax. On the next Rs 2.5 lakh you will have to pay tax at 5% rate. Your tax liability comes to Rs 12,500, which has been doled out in the budget as rebate. Due to this, your tax liability comes down to zero which means you don’t have to pay any tax.
How you will calculate your income tax
Now consider this. Say you are earning Rs 8 lakh gross income in a financial year. Remember that there is a 20% tax rate on income of Rs 5,00,001 to Rs 10,00,000. And, on income of Rs 10,00,001 and above there is 30% tax rate. So, how you will calculate your taxable income? Of Rs 8 lakh that you earn in a year, you deduct Rs 50,000 standard deduction.
This standard deduction was introduced in last year’s budget which was Rs 40,000 at that time. The government has now increased it by Rs 10,000 to Rs 50,000. Last year, the government scrapped medical reimbursement and transport allowance from salary to make room for standard deduction.
Deduct interest on home loan as well
Now, your income is Rs 7.5 lakh (Rs 8 lakh minus Rs 50,000). Now minus Rs 1.5 lakh which you are allowed to do under Section 80C for making specified investments. Under this provision, your investments in public provident fund, insurance policy are tax exempt. You also get an exemption on house rent allowance which is included in Rs 1.5 lakh provision. Your income is now Rs 6 lakh (Rs 7.5 lakh minus Rs 1.5 lakh).
So, from this Rs 6 lakh deduct Rs 50,000 for your National Pension System or NPS contributions, which are tax exempt. If you have taken a house loan and paying interest on it, you can claim deduction of up to Rs 2 lakh. Your final taxable income now comes down to Rs 3.5 lakh. On this Rs 3.5 lakh you will not have to pay any tax as it is less than Rs 5 lakh.
