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Post tax, Rs 5 lakh income will be higher than Rs 5.16 lakh: Here's why

If your net taxable income exceeds Rs 5 lakh by even Re 1 then you will be ineligible to avail a tax rebate.

, ET Online|
Last Updated: Feb 28, 2020, 10.04 AM IST
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Individuals, whose income just exceeds Rs 5 lakh, would be liable to pay more tax than the amount by which their income exceeds Rs 5 lakh.
For the financial year 2019-20, if a person's net taxable income (i.e., income after subtracting all the deductions and tax-exemptions the person is eligible for) does not exceed Rs 5 lakh, then he/she is eligible for rebate of the full tax payable on the income. As per current income tax laws, a person is eligible for tax rebate up to Rs 12,500 under section 87A, if the net taxable income does not exceed Rs 5 lakh. Therefore, the tax liability in such a situation will be zero.

However, if your net taxable income exceeds Rs 5 lakh by even Re 1, say it is Rs 5,00,001, then you will not be eligible to avail the benefit of tax rebate. You will be liable to pay taxes as per the income tax rates applicable to your income.

Individuals, whose income just exceeds Rs 5 lakh, would be liable to pay more tax than the amount by which their income exceeds Rs 5 lakh. Consequently, a person with a taxable income of Rs 5,10,000 is likely to be left with a post tax income lower than Rs 5 lakh. This can be explained with an example.

Suppose your net taxable income is Rs 5, 10,000. Then in such a case, here is what your tax liability will look like:
Income

Tax liability

Up to Rs 2.5 lakh

0

Between Rs 2.5 lakh and Rs 5 lakh

5% of Rs 2.5 lakh = Rs 12,500

Income above Rs 5 lakh (Rs 10,000)

20% of Rs 10,000 = Rs 2000

Total tax liability

Rs 14,500

Final Tax liability with cess @ 4%

Rs 15,080


As shown in the example above, even a marginal increase in income above Rs 5 lakh has resulted in more tax outgo than the incremental income. Increase in income beyond Rs 5 lakh is marginal - only by Rs 10,000 but the tax liability due to such incremental increase is Rs 15,080. Consequently, after paying the Rs 15,080 as tax, the person would be left with post tax income of Rs 5,10,000 minus Rs 15,080, that is, Rs 494,920. On the other hand, a person having taxable income of Rs 5 lakh will be left with a post tax income of Rs 5 lakh (tax rebate for income up to Rs 5 lakh).

This means that had the person donated the income in excess of Rs 5 lakh (Rs 10,000 in this case) to an entity offering 100% deduction on the donated amount, he/she would have been left with higher post tax income than if he/she had kept the income and paid tax on the whole.

Remember in such a situation an individual is not eligible to receive the marginal relief which is normally available as per income tax law wherever surcharge is leviable on income tax payable. Surcharge on income tax payable is levied when total income of an individual exceeds Rs 50 lakh in a financial year.

Chartered Accountant Naveen Wadhwa, DGM, Taxmann.com says, "If the net taxable income of an individual exceeds Rs 5 lakh marginally, then it is likely that the individual will end up paying more tax than the increase in the income. In such cases, the individual is not eligible to receive the marginal relief benefit which is available if total income marginally exceeds the prescribed limit of Rs. 50 lakh or Rs. 1 crore or Rs. 2 crore or Rs. 5 crore, as the case may be."

When an individual's tax liability (due to income crossing a threshold limit) is higher than the excess of income above the prescribed limit, then marginal relief comes into play. The purpose of marginal relief is to ensure that the increase in tax liability of an individual is not in excess of the income above the prescribed limit.

The marginal relief is offered to an individual to ensure that the surcharge levied on income tax payable is not in the excess of incremental increase in the income.

However, there is a break-even point where the excess income above Rs 5 lakh is equivalent to the tax liability inclusive of cess.

Abhishek Soni, CEO and founder, Tax2win.in says, "If the net taxable income is Rs 5,16,414 then the tax liability in such case will be Rs 16,414 (inclusive of cess). Here the excess of income above Rs 5 lakh i.e. Rs 16,414 is equal to the tax liability of Rs 16,414. Individual whose income is above this break-even point (Rs 5, 16, 414) will not be affected by the higher tax liability as their tax outgo will be lower than the excess of the income."

What can you do in this case?
For individuals' whose income is less than or equal to Rs 5,16,414, then to reduce your net taxable income to Rs 5 lakh, you can avail various deductions under Income Tax Act.

Most commonly used deductions are under section 80C, 80D, and so on. However, if you have exhausted the most commonly available tax-benefit, then you can avail the tax benefit under section 80G of the Income Tax Act.

Wadhwa says, "Section 80G offers a deduction of 50/100 percent of the donated amount depending on the institution to which you have donated money. An individual can donate the amount of income which is in excess of his/her taxable income of Rs 5 lakh to bring their net taxable income to Rs 5 lakh and thereby make their tax liability zero. It should be noted that the donation should be made on or before March 31 of the relevant financial year."

While donating the money to an institution under section 80G, it is important to check how much tax break you will receive. As per income tax rules, amount of donations that can be claimed under section 80G is determined as per certain rules. An individual is eligible for deduction of 100% or 50% of the donated amount subject to 'with' or 'without' any upper limit.

Also Read: Donating money? Check how much tax benefit you will get
Click here for all the information and analysis you need for tax-saving this financial year
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