India Tax and advisory, business entry and consulting services


Understanding the 87A rebate : Budget 2019

Taxpayers found an unexpected bonanza in the budget in the form of increase in rebate under section 87A. The limit for such rebate has been hiked from the erstwhile Rs 2500 to Rs 12,500 to all taxpayers whose incomes do not exceed Rs 500,000.

So does this mean that all taxpayers earning incomes above Rs 500,000 will have to pay no taxes on the first Rs 500,000 of their incomes? Not quite. Lets understand the nuances of this rebate first.

Rebate Versus Exemption.

What the budget has provided for is a rebate and not an exemption. Whereas an exemption essentially denotes the ability of an individual to not pay taxes on incomes earned, a rebate on the other hand is a relaxation in taxes otherwise payable. Under an exemption no tax liability may arise up to specified limits whereas in the case of a rebate any tax liability that may arise is reduced by the amount of the rebate offered, subject to conditions.

The condition in the latest budgetary proposals is that the income of the taxpayer should be no more than Rs 500,000 to be able to benefit from the rebate on offer.

Lets look at this from a practical perspective.

First lets understand that the Rs 500,000 limit pertains to taxable income and not gross income. Gross income is what your total CTC is for example whereas taxable income is gross income less deductions such as interest on home loans, medical insurance premium, and tax eligible investments made by you if any. These deductions can be substantial Interest under home loan is deductible till Rs 200,000 for example, investment linked deductions are capped at Rs 1,50,000.  How taxable incomes are arrived can be seen from below.

Income 925,000
Less : Deductions
Investments under 80C 150000
Interest on Home loan 200000
medical insurance 25000
New Pension scheme 50000
Taxable Income 500,000

Post such deductions, lets consider the case of four conveniently names friends, A, B, C, and D whose taxable incomes and taxes payable on such incomes have been detailed in the following table.

Understating the 87A rebate

 ABCD
TOTAL Tax Payable

000117,000
Taxable Income ( post deductions)250,000
400,000500,0001000000
Tax on income
07,50012,500112,500
Less : Rebate
07,50012,5000
Cess0004500

As can be seen individuals earning taxable incomes up to Rs 500,000 will have to effectively pay no taxes at all. Given the quantum of deductions it is possible for someone earning Rs 9,25,000 to still pay no tax at all.

Needless to add a bit of clever strategic planning will ensure plenty of tax savings.

Should you need any help with structuring salaries for your teams , do get in touch. 

Comments are closed.