Josh is high, but tax savings are small for middle class

Departing from traditional norms, the interim Budget doled out some benefits for salaried middle-class taxpayers. Finance minister Piyush Goyal pointed out: “It is just and fair that some benefits from the tax reforms (read it to mean an increase in tax collection and the tax base) must also be passed on to middle-class taxpayers.”

Besides raising the standard deduction from Rs 40,000 to Rs 50,000, the finance minister proposed a full rebate for individual taxpayers having total income of up to Rs 5 lakh. Currently, a rebate of Rs 2,500 was available to those having a taxable income of up to Rs 3.5 lakh.

But now all those in the Rs 5 lakh taxable income bracket will have nil tax. Such individual taxpayers were earlier paying tax of up to Rs 13,000 (including cess) which will not be payable now.

The increase in standard deduction will translate into a minor saving, for those in the upper tax brackets. Collectively, it is expected to provide a tax benefit of Rs 4,700 crore to more than three crore salary earners and pensioners.

Assuming that a taxpayer takes the full benefit of Rs 1.5 lakh available as a deduction for various investments made during the year (such as PPF, repayment of housing loan, LIC premium, tax-saving mutual funds), owing to the rebate proposal, a gross income of up to Rs. 6.5 lakh may not attract any I-T at all. If the proposed standard deduction of Rs 50,000 available to salaried taxpayers is considered, a gross income of up to Rs 7 lakh may not attract any tax.

However, the FM extended a “rebate” and not an exemption, so the reach of this benefit is limited. Let us illustrate the difference. If income of Rs 5 lakh was exempt, then for a person having a gross taxable income of Rs 20 lakh, I-T would have been payable only on Rs 15 lakh at the applicable slab rate. A rebate, on the other hand, is a deduction available available against the I-T payable, if the taxable income is up to Rs 5 lakh.

TOI analysed two scenarios, decoding the impact of the rebate.

Case 1: The gross taxable income of the taxpayer is Rs 7 lakh. The entire deduction of Rs 1.5 lakh available under section 80C has been claimed. Given that the standard deduction has been hiked by Rs 10,000 – it brings down the net taxable income to Rs 5 lakh in the proposed scenario and a resultant I-T saving.

Under the proposed scenario, the I-T levy is Rs 12,500 and a full rebate of this amount will be available. Thus, there will be no I-T payable, as opposed to an I-T outgo of Rs 15,000 approx under current I-T laws.

Case 2: The gross taxable income of the taxpayer is Rs 9.5 lakh. The entire deduction of Rs 1.5 lakh available under section 80C has been claimed. A hike of Rs 10,000 in standard deduction reduces the net taxable income to Rs 7.5 lakh in the proposed scenario. Here, as the taxpayer has a net taxable income of more than Rs 7.5 lakh, no rebate is available from the I-T levy of Rs 62,500. So, the taxpayer saves just Rs 2,000 odd, owing to the enhanced standard deduction of Rs 50,000.