The Interim Budget for 2019-2020 was presented before the Parliament on Friday. In his speech, acting Finance Minister Piyush Goyal reiterated the Government’s commitment towards uplifting the poor and middle class numerous times. To this end, he proposed allowing full tax rebate to individuals taxpayers having taxable annual income up to Rs 5 lakh.
While this move was widely celebrated, like many other tax law changes it has been misunderstood by the public at large. The popular view appears to be, that the threshold limit of Rs 2.5 lakh available to all taxpayers has been increased to Rs 5 lakh.
Some news reports also seem to suggest that this benefit would only be available to taxpayers in the age group of 60 – 80 years. In this article, we aim to break-down the proposed reform and explain some of the nuances of Income tax, that are relevant to understand its implications.
First, it is imperative to distinguish between ‘exemptions’, ‘deductions’, ‘threshold limit’, and ‘rebate’. Exemptions under the Income Tax Act include receipts such as leave travel concession and, house rent allowance that do not form a part of the taxpayers’ income at all. Deductions on the other hand, are sums that would ideally form a part of one’s income, but are specifically excluded, while computing the total income. Examples of deductions allowed under the Income Tax Act include premium paid for life insurance, contributions to provident fund, investment in equity linked saving schemes. These are typically allowed by the Government with a view to facilitate savings and investments. Further, no tax is levied on the first Rs 2.5 lakh earned by taxpayers below the age of 60 years. This amount is generally referred to, as the threshold limit. For taxpayers in the age-group of 60-80 years the threshold limit is Rs 3 lakh, and for those above 80 years it is Rs 5 lakhs. Lastly, rebate is merely a concession from tax, allowed to certain eligible taxpayers on fulfilment of the prescribed criteria.
It is relevant to understand that Friday’s budget did not alter the current scheme of exemptions, deductions, or the threshold limit. It merely increased the amount of rebate of tax granted under the Income Tax Act. Therefore, the view that the same is available to all taxpayers regardless of whether they satisfy the eligibility criteria, is deeply flawed.