Situations where tax is payable even if Income is less than Rs. 5 lakhs

Situations where person has to pay tax even if Income is less than Rs. 5 lakhs

In Budget 2019 our finance minister has announced that no tax will be paid on Income up to Rs. 5 lakhs. Many of us misunderstood that the income tax slabs have been increased, whereas the finance minister has mentioned during the speech that the rate of the income tax will remain the same. Thus, instead of increasing the slab rate there has been a change in the amount of rebate. As per the budget 2019 there has been made an amendment under section 87A. As per section 87A where the individual Net Total Income during the previous year 2019-20 does not exceeds Rs. 5, 00, 000 then he is eligible for a rebate of Rs. 12,500 or the amount of tax whichever is lower. Previously till PY 2018-19 where the individual’s income does not exceed Rs. 3,50,000 then he used to get rebate of Rs. 2, 500 or the amount of income tax whichever is lower. Also the point of no tax even if the Total Income is up to Rs. 6, 50, 000 is subject to the deductions of Rs. 1, 50, 000 under 80C, 80TTA, 80D etc.

We can say that a person who is earning income up to Rs. 5, 00, 000 is not liable to pay tax. Whereas there are some situations where a person will have to pay tax even if the total income of the individual is up to Rs. 5, 00, 000. Below are some situations where the person has to pay tax even if the income is less than Rs. 5 lakhs:

1. Nonresident: A non-resident has to pay tax even if the income is up to Rs.  5, 00, 000, because section 87A applies to only to the individual resident of India and not to any person whose residential status for the previous year 2019-20 is a non-resident. If a person become nonresident for the PY then in such case, he will be ineligible for claiming the rebate under section 87A.
2. Individual earning long term capital gains under section 112: In budget 2018 the government has inserted a new section 112A where the individual has to pay tax at the rate of 10% on long term capital gains over and above Rs. 1, 00, 000 on sale of equity shares, equity oriented mutual funds and scrapped the section 10(38) where an individual used to get exemption on the long term capital gain earned. As per the provision of section 112A rebate under section 87A does not applies on section 112A. However, the individual shall get the rebate for other heads of income. For instance, Mr. A has a Net total income of Rs. 4, 50, 000 after considering all the deductions out of which Rs. 2, 00, 000 is income from salary and balance Rs. 2, 50, 000 is Income from long term capital gains from sale of equity shares. If we take in to consideration the benefit of basic exemption and Mr. X is a normal resident individual having basic exemption of Rs. 2, 50, 000 then remaining balance of capital gains after considering the basic exemption remains Rs. 2, 00, 000 out of which up to Rs. 1, 00, 000 is exempt and remaining Rs. 1, 00, 000 is taxed at 10% flat rate plus 4% health and education cess. Thus, Mr. A has to pay tax of Rs. 10,400 even though his Total income is less than Rs. 5, 00, 000.
3. Persons other than individuals: Section 87A applies only to individual thus the provision does not apply to HUF, companies and firms and hence persons other than individual cannot claim the rebate.

Bare act portion of section 112A for reference:

Tax on long-term capital gains in certain cases.

112A. (1) Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be determined in accordance with the provisions of sub-section (2), if—

(i)  the total income includes any income chargeable under the head “Capital gains”;

(ii)  the capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust;

(iii)  securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004) has,—

(a)  in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or

(b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset.

(2) The tax payable by the assessee on the total income referred to in sub-section (1) shall be the aggregate of—

(i)  the amount of income-tax calculated on such long-term capital gains exceeding one lakh rupees at the rate of ten per cent; and

(ii)  the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains referred to in sub-section (1) as if the total income so reduced were the total income of the assessee:

Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, the long-term capital gains, for the purposes of clause (i), shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax.

(3) The condition specified in clause (iii) of sub-section (1) shall not apply to a transfer undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transfer is received or receivable in foreign currency.

(4) The Central Government may, by notification in the Official Gazette, specify the nature of acquisition in respect of which the provisions of sub-clause (a) of clause (iii) of sub-section (1) shall not apply.

(5) Where the gross total income of an assessee includes any long-term capital gains referred to in sub-section (1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains.

(6) Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

Explanation —For the purposes of this section,—

(a)  “equity oriented fund” means a fund set up under a scheme of a mutual fund specified under clause (23D) of section 10 and,—

(i)  in a case where the fund invests in the units of another fund which is traded on a recognised stock exchange,—

(A) a minimum of ninety per cent of the total proceeds of such fund is invested in the units of such other fund; and

(B) such other fund also invests a minimum of ninety per cent of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange; and

(ii)  in any other case, a minimum of sixty-five per cent of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange:

Provided that the percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;

(b)  “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005);

(c)  “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43.