In Budget 2019, Honorable Finance Minister announced that ‘Those having taxable income of up to Rs 5 lakh will not have to pay any tax for FY 2019-20’. An individual who is resident in India and whose taxable income does not exceed Rs. 5,00,000 is entitled to claim rebate under section 87A. Rebate is available in the form of deduction from the tax liability. Rebate u/s. 87A will be lower of 100% of income-tax liability or Rs. 12,500. In other words, if the tax liability exceeds Rs. 12,500, rebate will be available to the extent of Rs.12,500 only and no rebate will be available if the total income (i.e. taxable income) exceeds Rs.5,00,000/-
But what about the person having taxable income slightly more than Rs.5,00,000/-, say person having Taxable income between 5 Lacs to 6 Lacs. Tax Liability that the person has to bear would be like a mental burden without any incentive.
Let’s discuss the same as per following example.
| Particulars | Case-1 | Case-2 | Difference |
| Taxable Income | 5,00,000 | 5,05,000 | Income difference of Rs.5,000 only |
| Tax Calculation | |||
| Upto 2.50 Lacs | Nil | Nil |
Nil Tax in Case 1
V/s.
Tax Payable 14,040 in Case 2 |
| 2.50 Lacs to 5.00 Lacs @5% | 12,500 | 12,500 | |
| 5.00 Lacs to 5.05 Lacs @20% | N.A. | 1,000 | |
| Basic Tax | 12,500 | 13,500 | |
| Less : Rebate u/s. 87A | (12,500) | Nil | |
| Add : Education Cess @4% | Nil | 540 | |
| Tax Payable | Nil | 14,040 |
As evident from above example, person having Taxable Income of Rs 5.05 Lacs has to pay Rs.14,040/- as tax against the person having Taxable Income of Rs.5.00 Lacs i.e. Just marginal increase in Income of Rs.5,000/- lead to having Tax burden of Rs.14,040/-. If taxable income of taxpayer marginally exceeds the limit of Rs. 5 lakhs, the tax liability increases considerably.
Equality is a fundamental principle of taxation. The taxing power of the legislature must always be exercised in such a way that the burdens imposed by taxation are laid as equally as possible on all classes. Equality would be achieved only when no higher rate in proportion to value is imposed on one individual or his property or income, than on other individual or property or income in similar circumstances. But without any Marginal Relief in case of Rebate u/s.87A, Equality is not evident from present tax rate structure.
Let us discuss the same from another point of view. Person having Taxable Income of Rs.6,00,000/- has to bear Tax of Rs.33,800/- against person having No Tax Liability with Taxable Income of Rs.5,00,000/-. Salaried Employee or Small Businessman looks the same like having Marginal Tax Rate of 33.80% between Income from Rs.5,00,000 to Rs.6,00,000 i.e. Tax of Rs.33,800 divided by Increase in Income of Rs.1,00,000/-.
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Consequences of non-equality due to section 87A.
Taxpayer with Greedy mind would try to reduce his/her income below Taxable Income of 5 Lacs by claiming false expenses / fake allowances /wrong rebates /dummy deductions etc to get benefit of Rebate u/s.87A. It would be unfair for honest taxpayers & society as a whole.
Positive Effect of Rebate under Section 87A
As the Rebate u/s. 87A is available based on Taxable Income criteria, this motivates & boost the morale of Taxpayers to save more tax by investing in eligible options of Investments u/s. 80C like Life Insurance Premium, Public Provident Fund, Tax Saver Fixed Deposits, Pension Funds etc. Let us discuss the same with the help of following example.
| Particulars | Case-1 | Case-2 | Difference |
| Gross Total Income | 6,50,000 | 6,50,000 | Deductions
V/s. No Deductions |
| Deductions under Chapter VI | (1,50,000) | – | |
| Taxable Income | 5,00,000 | 6,50,000 | |
| Tax Calculation | |||
| Upto 2.50 Lacs | Nil | Nil |
Nil Tax
V/s.
Tax Payable 44,200 |
| 2.50 Lacs to 5.00 Lacs @5% | 12,500 | 12,500 | |
| 5.00 Lacs to 6.50 Lacs @20% | N.A. | 30,000 | |
| Basic Tax | 12,500 | 42,500 | |
| Less : Rebate u/s. 87A | (12,500) | Nil | |
| Add : Education Cess @4% | Nil | 1,700 | |
| Tax Payable | Nil | 44,200 |
Thus, There would be instant Tax Saving of Rs.44,200/- by investing Rs.1,50,000/- i.e. approximate 29.47% immediate benefit. This motivates the person to Invest more on tax saving instruments & positive effect on overall economy.
Relief from Tax Payment, but Still need to File ITR
If you are thinking that having a taxable income of up to Rs 5 lakh means Bye-Bye to the Income Tax Department, then you need to check once again…You can avail of the zero tax benefit but you still need to file your income tax return (ITR) as per provisions of Section 139.
If you are a small taxpayer whose gross total income does not exceed Rs 5 lakh then the maximum fees you are liable to pay is Rs 1,000. This law of levying late filing fees under section 234F was introduced in the Budget 2017 and became effective for financial year 2017-18 or assessment year 2018-19 onwards.
Concept of Marginal Relief in Surcharge
Let’s now discuss the Concept of Marginal Relied available in case of Surcharge with the help of following example.
| Particulars | Case-1 | Case-2 |
| Gross Total Income | 51,50,000 | 52,50,000 |
| Deductions under Chapter VI | (1,50,000) | (1,50,000) |
| Taxable Income | 50,00,000 | 51,00,000 |
| Tax Calculation | ||
| Upto 2.50 Lacs | Nil | Nil |
| 2.50 Lacs to 5.00 Lacs @5% | 12,500 | 12,500 |
| 5.00 Lacs to 10.00 Lacs @20% | 1,00,000 | 1,00,000 |
| 10.00 Lacs to 51.00 Lacs @30% | 12,00,000 | 12,30,000 |
| Basic Tax | 13,12,500 | 13,42,500 |
| Less : Rebate u/s. 87A | Nil | Nil |
| Add : Surcharge @10% | Nil | 1,34,250 |
| Less : Marginal Relief | Nil | (64,250) |
| Basic Tax + Surcharge | 13,12,500 | 14,12,500 |
| Add : Education Cess @4% | 52,500 | 56,500 |
| Tax Payable | 13,65,000 | 14,69,000 |
Individual having total income of Rs.51 Lacs in the Financial Year, he will have to pay taxes inclusive of a surcharge of 10% on the tax computed i.e., total tax payable will be Rs.14,76,750 (13,42,500+1,34,250). But, if he would have earned only Rs.50 lacs, then the tax liability would have been Rs.13,12,500 only.
Isn’t it unfair for the individual? For earning an extra Rs.1,00,000, he will end up paying income tax of Rs.1,64,250 extra (14,76,750-13,12,500). The individual’s tax liability should be reduced to avoid any such excess tax payable. The individual will get a marginal relief of the difference amount between the excess tax payable on higher income i.e. (Rs.14,76,750 minus Rs.13,12,500 = Rs.1,64,250 ) and the amount of income that exceeds Rs. 50 Lacs i.e. (Rs.51,00,000 minus Rs.50,00,000 = Rs.1,00,000). The marginal relief will be Rs.64,250 (Rs.1,64,250 minus Rs.1,00,000).
But this marginal relief is available only to person in Rich Class who are liable to pay Surcharge, but not to the person in middle class income group living in Inflationary environment.
Hence, considering the above facts & genuine hardship being faced by Taxpayers, government should consider to bring the equality & system of Marginal Relief or some other way out that person within Middle Class Income Group should be availing Similar Tax Benefits & rebates.
References-
1. DTBA (Direct Taxes), Ludhiana Newsletter for Dec-2019
2. Finance Budget 2019
Content is merely for sharing knowledge & Educational Purpose only. Author can be reached at casagargambhir@gmail.com for any queries, issues & recommendations.
Author Bio
Forget equity. The rule “Rebate u/s. 87A will be lower of 100% of income-tax liability or Rs. 12,500.” .. does not make sense. To apply this provision at all, the tax liability must be more than Rs 12,500. For an individual, this will happen only if taxable income is more than Rs 5L. In which case, “no rebate will be available if the total income (i.e. taxable income) exceeds Rs.5,00,000/-“. In other words, if the taxable income is under 5L, no tax is payable but if taxable income is more than 5L, the usual slab system applies. Of course there is a glaring inequity here as pointed out by Mr Gambhirji. A better approach would see the rebate taper off, being full 100% up to a certain limited income but gradually decreasing to 0 at 5L.
Under the present regime there is no exemption of time limit even for soldiers guarding our border. Even a person in coma has to wake up and file his ITR. Totally not bothered about the genuine problems.
This is very hard to speak under current regime against any issue.The service class feeding five member family has nothing to share not even his or her grief.Tax structure of country is slavery system for service class.Because political class has nothing to do with pity of individual except playing foul political game middle class has always been crushed by every government.
Lovely Article. Neatly explained.