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No marginal relief for taxpayers whose taxable income exceeds Rs 5 lakh
February, 22nd 2019

Although the interim budget 2019 has made income up to Rs 5 lakh tax free, the marginal increase in income above Rs 5 lakh will result in more tax outgo than the incremental increase in income, says Sonu Iyer, Leader and Tax Partner, People Advisory Services, EY India. She was speaking at the ET Wealth Investment Workshop held at Delhi on February 15.

This was explained by Iyer with an example. Taxpayers whose income does not exceed Rs 5 lakh will not be liable to pay any tax as per the proposed rebate in the Budget 2019. However, taxpayers whose income exceeds Rs 5 lakh by a marginal amount, say Rs 10,000, will end up paying more tax than the increase in income.

It can be seen from the table above that for a taxpayer whose taxable income (after claiming all the eligible deductions and tax exemptions) comes to Rs 5, 10,000 will have tax liability of Rs 15,080 (inclusive of cess at 4 per cent).

Here the tax liability is more than the incremental increase in income. The taxable income has increased by Rs 10,000, whereas the tax liability is Rs 15,080 which is higher by Rs 5,080.

Iyer further pointed out that marginal relief is available where surcharges are levied, i.e., surcharge of 10 per cent for income between Rs 50 lakh and 1 crore and 15 per cent surcharge for income exceeding Rs 1 crore. Current income tax laws say that the incremental tax cannot be more than the increase in income. However, going by the proposed budget changes, there is disconnect regarding the marginal relief for small taxpayers.

Explaining the budget proposals to the audience, Iyer said that every class of salaried taxpayer will be benefited by the proposed increase in standard deduction. Remember Finance Minister Piyush Goyal in his budget speech has proposed to increase the standard deduction limit to Rs 50,000 from current Rs 40,000, a hike of Rs 10,000.

As per the proposals, a hike in standard deduction along with tax rebate will lead to the following tax relief:

As proposed in the budget there will be no income tax levied on deemed rent from second self-occupied house. However, total home loan interest deduction has been limited to Rs 2 lakh for both houses together, said Iyer.

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