Union Minister Piyush Goyal announced a measure of relief for income tax payers in his Budget speech on Friday: people who earn up to Rs 5 lakh a year will not have to pay any taxes, he said. The announcement got roars of support in the Lok Sabha. But what will it actually mean?
Convention suggests that governments presenting a budget right before elections do not significantly change the way taxes work so that the new government which takes over after the polls can make that decision. Goyal acknowledged this, saying that the main tax proposals will be presented in the regular budget.
But, he added, “small taxpayers especially middle class, salary earners, pensioners, and senior citizens need certainty in their minds at the beginning of the year about their taxes. Therefore, proposals, particularly relating to such class of persons should not wait.”
Here is what he announced:
“While for the present the existing rates of income tax will continue for FY 2019-20, I propose the following:
Individual taxpayers having taxable annual income up to Rs 5 lakhs will get full tax rebate and therefore will not be required to pay any income tax.”
Both portions of this statement are important.
Tax rates stay same
Goyal said clearly that the existing rates of income tax would stay the same: 0% tax for those earning up to Rs 2.5 lakh, 5% for those earning between Rs 2.5 lakh to Rs 5 lakh, 20% for those earning from Rs 5 lakh to Rs 10 lakh, and 30% for those beyond.
Rebate for up to Rs 5 lakh
The only change that comes in is for those who earn between Rs 2.5 lakh to Rs 5 lakh. Those who fall into this slab will now be eligible for a rebate up to Rs 12,500, equivalent to the 5% tax that they would have paid on that income. In effect then, those who were earlier paying 5% tax, will now get the full amount back and so not pay any taxes.
But this is very different from a change to the tax slabs.
Usually when the government changes tax slabs, that affects the way everyone pays taxes, no matter how much they earn. This is called a marginal tax.
Right now, anyone earning Rs 20 lakh in total is paying 5% for income of between 2.5 lakh to Rs 5 lakh, 20% for income between Rs 5 lakh and Rs 10 lakh, and 30% for income between Rs 10 lakh and Rs 20 lakh. If the slabs had been changed keeping the rate at 0% for up to Rs 5 lakh, this would have meant the person earning Rs 20 lakh would also not have to pay taxes for the first Rs 5 lakh they earn and only pay beyond that.
But that will not be the case under Goyal’s proposal in the Budget speech. Instead, anyone earning even a rupee more than Rs 5 lakh, will be paying the same taxes as they did last year, unless they also put money into other tax-saving instruments.