Acting Finance Minister Piyush Goyal on Friday (February 1) announced a slew of changes in personal income tax rules to help small and marginal taxpayers.
Goyal said at least three crore Indians would benefit from the new tax proposals in the government’s interim budget 2019.
A full tax rebate has been allowed for people who have net taxable income up to Rs 5 lakh.
Those earning Rs 6.50 lakh can also get a full rebate considering that standard deduction has been increased by Rs 10,000 to Rs 50,000. An individual would have to invest in other tax-free investment schemes (up to Rs 1,50,000) under Section 80C of the income tax.
However, there is scope for further saving under the personal income tax category. Let’s have a look at the key points that will help you save more:
The proposed income tax changes, applicable from April 1, will offer a straight Rs 50,000 as standard deduction.
So, if an individual is earning Rs 5.50 lakh per annum, a standard deduction of Rs 50,000 would bring down his net taxable income to Rs 5.00 lakh per annum. The applicable tax on the income comes to Rs 13,000 per annum.
Since the government in its finance bill proposed Rs 12,500 as the new maximum tax rebate for income up to Rs 5 lakh, only the education and health cess of Rs 500 (4 per cent of total tax of Rs 12,500) has to be paid by the concerned person.
The standard deduction of Rs 50,000 applies to all. Most people will be able to save Rs 2,000-3,000 annual due to the new benefit.
No changes in income tax slabs
There are no changes in the existing income tax slabs, clarified Goyal yesterday after people initially burst into joy with the notion that the income tax exemption threshold has been increased to Rs 5,00,000.
No, it’s not a tax exemption that has been proposed by Goyal yesterday. Let’s understand the difference:
- Tax exemption: Some sources of income are totally exempt from income tax. Currently, the tax exemption offered on annual income stands at Rs 2.50 lakh. If an individual’s income is Rs 6,00,000, the net tax payable will be calculated after deducting the current exemption limit of Rs 2.50 lakh. A tax exemption is a situation where your income does not attract any tax. Components such as HRA, agricultural income are exempt from taxation.
- Tax Rebate: A tax rebate, however, is the amount the assessee is not liable to pay. He/she would can claim a rebate in such a case.
- Tax deduction: A tax deduction is the amount that is deducted by the income tax department towards expenses and investments incurred by the taxpayer. A deduction of up to Rs 1.50 lakh is offered under Section 80(C) for investment in ELSS schemes, PPF, NSC, and a few other tax-free saving instruments.
Assuming that you have understood the key difference between the three tax rules, let’s examine FM Goyal’s speech.
Goyal’s proposed a full tax rebate (of Rs 12,500) under Section 87A for individuals with an annual income up to Rs 5 lakh. This is by no means an exemption.
In a nutshell: People who have a net taxable income of Rs 5,00,000 after all the deductions will enjoy a tax benefit but a person Rs 10 lakh may have to pay tax in accordance to the old tax slabs.
For instance: If Mr. Somesh earns Rs 10,00,000 per annum, his standard deduction will be Rs 50,000, taking his net taxable income to Rs 9,50,000 per annum.
Assuming that he has no other investments, he total tax incidence would come to Rs 1,40,000 along with an additional education & health cess of Rs 5,600. Only those with net taxable income at Rs 5,00,000 will get a full tax rebate.
However, if Somesh had made certain investments, he would have been able to avail the benefit as well.
Interim Budget 2019: Income over Rs 10 lakh? Here is how you can avoid paying a single paisa in tax
Tax-free investments to the rescue!
Using tax-free investments is the key to making the most of Goyal’s new personal income tax announcements.
An individual earning Rs 6,50,000 per annum can easily bring down his/her net taxable income to Rs 5,00,000 (eligible for rebate) under new income tax rules.
Using investment options such as Section 80(C), where an individual can claim deductions up to Rs 1,50,000, can help bring down the total taxable income to Rs 5,00,000, thus making the individual with annual income up to Rs 6,50,000 qualifies for a full rebate.
|Investment options for you: Those with income up to Rs 7,50,000 per annum can also claim a full rebate if they qualify for Section 80(C) deductions of Rs 1,50,000, Standard deduction of Rs 50,000, medical insurance under Section 80D, National Pension Scheme or NPS of Rs 50,000 under Section 80CCD(1B), maximum deduction of Rs 10,000 under Section 80TTA.|
As soon as you net taxable income Rs 5,00,000, the entire income tax on the amount (5% of Rs 2,50,000 or Rs 12,500) comes to nil after the proposed rebate of Rs 12,500 under Section 87(A) of the Income tax act.
Housing tax rule changes that you should know
If you have two houses, current income tax rules require an individual to pay notional rent on the second self-occupied house irrespective of any other factor.
Goyal has proposed to change the rule and exempt tax on notional rent on a second self-occupied house.
“Currently, income tax on notional rent is payable if one has more than one self-occupied house. Considering the difficulty of the middle class having to maintain families at two locations on account of their job, children’s education, care of parents etc. I am proposing to exempt levy of income tax on notional rent on a second self-occupied house,” he said.
This would allow you to pay no tax on a second house, assuming it is not let out to any tenant. At present, this rule only applied to one property. It will also offer a slight boost to the ailing realty sector.
In a nutshell: Let’s assume Mr. Raj owns three house properties. He lives in one with his family and the other two are vacant. In such a case, two out of the three properties can be considered ‘self-occupied’ while the third one will be assumed as “let out”.
Therefore, you have to pay tax on only one of the three properties.
Bad news for people with 2 houses with outstanding loans: Meanwhile, if an individual has two houses and is paying interest on loans for both, the deduction benefit would not exceed Rs 2 lakh per annum. It may lead to complications for people who have outstanding loans on a second property.
Currently, an individual can carry forward losses up to 8 assessment years (in case the loss towards interest payment on the second property exceeds Rs 2 lakh in a single fiscal year).
However, the new rule has curbed the freedom to carry forward remaining housing loan interest above Rs 2,00,000 on the second-occupied self-property.
This may pose to be a reason for concern for those having two self-owned properties with outstanding loans.
LTCG benefit on housing investment: If an individual has earned long-term capital gains from the sale of a property, he/she can now invest in up to two residential properties in India compared to just one allowed as per present norms.
This option will be available one in a lifetime for individuals where capital gains on sale from house property is up to Rs 2 crore.