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Considering Even Normal Deductions, Income up to Rs. 7,85,000 is Tax Free

Income Tax Middle Class PM Modi

In an earlier article, we have explained the various measures taken by the Modi government in last 5 years to provide relief to the salaried and middle-class taxpayers. The government has also taken steps to reduce the tax burden on senior citizens. However, since most of the income tax payers fall in the category of middle class and salaried employees, we will explain how they have benefitted under the current government.

What has Changed in the Last 5 Years for Income Tax Payers

Assuming that an individual’s annual income is up to Rs. 7,85,000, in the table below, apart from explaining as to how NDA government took various measures (in Part A), we have explained (in Part C) how an individual’s income becomes tax free even when he/she has exhausted the normal deductions available to an income tax payer.

*Tax Rebate under section 87A of the IT Act was Rs. 2,000 for up to the taxable income of Rs. 5,00,000 in 2013-14. But in above case, the taxable income crossed this limit, thus no tax rebate can be given and hence shown as nil.

**It is this tax rebate under section 87A (Rs. 2,000 in 2013-14 & existing Rs. 2,500 in 2018-19) which has been increased by the government to Rs. 12,500 for up to the income of Rs, 5,00,000 for financial year 2019-2020).

*** Tax under UPA will also attract 3% Cess on tax to be paid in the above table, thus the total tax liability under UPA will come to Rs. 63,860 whereas under NDA, it is zero.

It is important to note that the above table has considered only those deductions which are normally exhausted by individual taxpayers such as section 80C, health insurance, among others. If other deductions such as home loans etc are also considered, an individual with an income up to Rs. 10 lakhs will also go tax free.

Changes Made by NDA over Last 5 Years

Budget 2014-15

  • The basic tax exemption limit was hiked from Rs 2 lakh to Rs 2.5 lakh for the individual taxpayers below the age of 60 years.
  • Deduction limit under section 80C of the Income Tax Act 1961 was raised by Rs. 50,000 to Rs. 1.5 lakh from 1 lakh under the UPA government.

Budget 2015-16

  • Additional deduction of Rs. 50,000 was introduced making National Pension Scheme (NPS) under section CCD (1B) of Income Tax Act more attractive. This added to the earlier hiked deduction of Rs. 1.5 lakh taking the total tax-saving to Rs. 2,00,000 per fiscal.
  • The deduction limit for health insurance premium under section 80D of Income Tax Act was raised from Rs. 15,000 to Rs. 25,000 for individual taxpayers.

Budget 2017-18

  • The tax rate for individuals in the tax bracket – Rs. 2.5 lakh to Rs. 5 lakh – was reduced to 5 per cent from 10 per cent, offering a saving of another Rs. 12,500.

Budget 2018-19

  • This budget introduced the standard deduction of Rs. 40,000.

Budget 2019-20

  • The government announced that no income tax was to be paid by an individual with income up to Rs. 5 lakh. In other words, tax rebate under section 87A has been increased from Rs. 2,000 to Rs. 12,500 on the taxable income up to Rs. 5,00,000. Thus, Modi government has effectively increased the rebate.
  • Also, the standard deduction has been increased to Rs. 50,000 from earlier Rs. 40,000 which was also introduced by the Modi government itself.

In a nutshell, the government has systematically brought tax relief to taxpayers in last 5 years. It has removed the tax burden from the lowest bracket where most of the taxpayer’s population falls, i.e., Rs. 5 lakh segment. Going a step ahead, it has also raised deductions for the salaried taxpayers who with smart financial management need not pay a single penny of income tax, as explained above. Also, the amount invested by them in various tax saving schemes will fund various long-term infrastructure projects in the country helping in building a New India.