Income of Rs. 10/- can increase your tax liability by Rs. 2,575/- Logically Illogical- It’s Income Tax Act-1961.

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Income of Rs. 10/- can increase your tax liability by Rs. 2,575/- 

Logically Illogical- It’s Income Tax Act-1961.

Do law and logic actually go hand in hand? One may think laws are meant to be based on some logic, but it may not be so.

A simple question arises, why do the law makers do not take into consideration all the permutations and combinations of various repercussion while drafting the law?

Let us visit one such issue.

For the FY 2017-18, There is Mr. X who is earning Rs. 3,50,000/- & there is one Mr. Y who is earning Rs. 3,50,010/- after deduction under chapter VI-A which includes deduction towards LIC,  PPF, Mediclaim etc.

You will be surprised to see that the Tax liability in the hands of Mr. X vis a vis Mr. Y in the above mentioned case.

Tax liability of Mr. X would be 5% on Rs. 1,00,000/- ( After taking benefit of slab of RS. 2,50,000/-) less Rs. 2,500/- on account of Rebate u/s 87A plus Education Cess at the rate of 3%. The total tax liability would be Rs. 2,575/-.

The tax liability of Mr. Y, would be 5% on Rs. 1,00,010/- ( After taking benefit of slab of RS. 2,50,000/-) plus Education Cess at the rate of 3%. The total tax liability would be Rs. 5,150/-..

In short, Government demands tax of Rs. 2,575/- from the person having income of Rs. 350000 while a tax of Rs. 5,150/- from the assesses having income of Rs. 350010. The person has to pay Rs 2,575/- extra for earning Rs. 10. This is what our law says.

The reason behind this calculation is Rebate u/s 87A. The rebate is available to a person if total income of person is less or equal to Rs. 3,50,000/-. The amount of Rebate available is Rs. 2,500/- or the amount of Tax whichever is lower. If the income increases over and above Rs. 3,50,000/- the benefit of Rs. 2,500 is lost and the assessee has to pay higher tax.

Although, Government wanted to provide with the incentive by introducing Section 87A of the Income Tax Act, 1961 but the actual circumstances did not let it go that way. Now, what shall government do? Is the way out that the Rebate is withdrawn? The answer will be no. Government may introduce the concept of marginal relief for Rebate also.

The concept of marginal relief is designed to provide relaxation from levy of surcharge to a taxpayer, where the total income exceeds a marginal amount and crosses the slab which leads to change in the rate of Surcharge.

Thus, while computing surcharge, in case of taxpayers (i.e. Individuals/ HUF/ AOP/ BOI/ artificial juridical person) having total income on which surcharge is payable, marginal relief shall be available in such a manner that the net amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax on total income plus the amount of increase in income.

Similar provision of marginal relief shall be introduced by government for the Rebate u/s 87A. The provision shall be such that an increase in the total income above Rs. 3,50,000/- shall not increase the income tax above the amount aggregate of income tax on Rs. 350000 and the increase in income.

To illustrate,

Say, an Indian Resident aged 48 years have total income of Rs. 350010. If marginal relief is introduced, tax is to be calculated as follows:

Tax on Total Income Rs.  5000
Add: Education Cess Rs.    150
Total Rs. 5150
Less: Marginal Relief

Tax on total Income   (A)                          Rs. 5150

Tax on Rs. 350000     (B)                          Rs. 2575

Increase in income     (C)                          Rs.   10


Marginal Relief =      (A)-((B)+(C))

Rs. 2565
Tax Payable Rs. 2585

Therefore, Government shall introduce this scheme to maintain the progressive nature on Income Tax.


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