Benefit by interim Budget-2019 of No Tax on Income up to Rs. 5 Lakh – Myths & Reality


Individual taxpayer with income up to Rs. 5 Lakh will not be liable for any income tax as per the proposal in the Interim Budget – 2019 on 1st Feb presented by Shri CA Piyush Goyal. Lot many taxpayers have formed an opinion that the basic exemption limit has been increased to Rs. 5 Lakh. This is not at all true. The basic exemption limit & tax slab has not been changed at all in this interim budget. What is actually proposed in the budget is a tax rebate of Rs. 12,500/- u/s 87A if the income of any individual taxpayers does not exceed Rs. 5 Lakh. Every proposal to amend the tax law carries some side effects. Provision says that there is a tax rebate up to Rs. 12,500/- if the income doesn’t exceed Rs. 5 Lakh which means that no tax rebate is available if the income exceeds Rs. 5 Lakh even marginally.

Let us compare the incidence of tax rebate u/s 87A in following two cases of Mr. Piyush & Mr. Arun:

FY 2019-20 (AY 2020-21) Mr. Piyush Mr. Arun
Gross Total Income from salary/business/Other Source 9,25,000 9,25,100
Less: Housing Loan Interest (2,00,000) (2,00,000)
Less: Deduction U/s 80C (LIC/PPF etc) (1,50,000) (1,50,000)
Less: Deduction U/s 80CCD(1B) (NPS) (50,000) (50,000)
Less: Deduction U/s 80D (Mediclaim) (25,000) (25,000)
Total Income
(after all permissible deduction)
5,00,000 500,100
Tax on above 12,500 12,520
Tax Rebate U/s 87A 12,500 0
Net Tax Payable 0 12,520
Add: Cess@4% 0 501
Total Tax Payable 0 13,021

There is difference of Rs. 100/- only in the income of Mr. Piyush & Mr. Arun. However, the tax liability of Mr. Arun has increased by Rs. 13,021/- due to additional income of Rs. 100/-.  Such illogical outcome was there in earlier regime also when the tax rebate was restricted to Rs. 5,000/- or Rs.  2,500/-. Law & logic are strangers. However, both have to be friends. This analogy needs to be fixed by introducing the concept of marginal taxation whereby if the income is increased marginally, the tax should be restricted to the amount of income, like Rs. 100/- in the case of Mr. Arun.

Whether income tax return (ITR) filing will be mandatory for next year if total income is not exceeding Rs. 5 Lakh?

  1. If any person who is under an obligation to file the ITR failed to do so then late fee (& it is not termed as ‘Penalty’) would leviable. For taxpayer with income up to Rs. 5 Lakh, late fee would be Rs. 1,000/-.
  2. Obligation to file the return of income U/s 139(1):
    In the case of Individuals, every person is required to file the ITR arises if the income ‘before claiming deduction under Chapter VIA (which includes deduction u/s 80C towards LIC/PPF/NSC/ELSS etc, U/s 80D towards mediclaim payment, U/s 80CCD(1B) towards National Pension Scheme (NPS) etc) exceeds the basic exemption limit. That is, even if the final taxable income is below basic exemption limit after claiming deduction U/s 80C, 80D, still taxpayer would be required to file ITR. Further, if income exceeds basic exemption limit prior to exemption u/s 10(38) towards Long Term Capital Gain (LTCG) arising from sale of shares then also such person is under an obligation to file the ITR. Any person having any beneficial ownership or any assets or signing authority in any account located outside India are mandatorily required to file ITR even if there is no income or income is below the basic exemption limit.

In short, filing of return is mandatory even if the tax liability is reduced to nil by virtue of tax rebate u/s 87A.