Academy of BFSI,

Impact of Change in 87A Income Tax Act 1961

As we all know, the primary duty of the government is to safeguard its citizens. There are many helpful provisions in the Indian tax laws to reduce your tax liability. Section 87A of the Indian Income Tax Act is one such provision. Rebate under section 87A provides for a marginally lower payment of taxes to individuals earning an income below the specified limit. It is provided to reduce the tax burden of the lower-income bracket.

There is a confusion among taxpayers that this Union Budget 2019 stated that there is no tax for the person whose income is below or equal to Rs.500000. But that is not correct. Let us discuss in detail. what is Sec 87A for FY 2018-19 and what is the change brought in FY 2019-20 and let us understand with the help of a case study?

How Sec 87A works for FY 2018-19?

A tax rebate of Rs.2500/- is allowed if one’s  Total income after all deductions (Net taxable income) is  Rs350000 or below, a rebate of Rs.2500 is allowed from the total tax payable and on the balance, Health & Education cess is levied and also surcharges based on the income.

What is the change in Union Budget 2019 FY 2019-20?

The tax rebate of Rs.2500 increased to Rs.12500 and also the net taxable income limit increased from Rs.350000 to Rs.500000.

Let us see the impact of this change and how much tax is saved.

Let us discuss with an example

Mr. Manohar aged 30 years is working as a system engineer in Infosys LTD. His income is Rs.600000/- for the FY 2018-19. He is having a life insurance savings policy in HDFC life insurance company and paying a premium of Rs.100000/-. He also Paid Tuition fees Rs50000 for his son Vikash who is studying 5th class in JSS Public school Bangalore.

Let us compute his tax liability

Total Income – 600000

Standard Deduction allowed for employees – 40000

Income after deducting Standard deduction – 560000

Deduction under chapter V1 A

Deduction under Sec 80C

1.Insurance policy Premium – 100000

2.Tuition fees for son – 50000

Total deduction – 150000

Net taxable income – 410000

Tax liability

Tax slabs 0-25000 – NIL

250001-500000 – 5% that is 5% on 160000 and tax payable is Rs 8000

Health and education cess is 4% on 8000 tax payable and that is Rs. 320

Total tax payable is Rs.8320

Let us assume there is no change in Manohar’s income and other tax savings but of course, his age increases to 31 and with the changes in Sec 87A in Union Budget 2019 what is his Tax liability and how much he is going to save.

Total Income – 600000

Standard Deduction allowed for employees 50000 (limit increased to 50000 from 40000)

Income after deducting Standard deduction 550000

Deduction under chapter V1 A

Deduction under Sec 80C

1.Insurance policy Premium 100000

2.Tuition fees for son – 50000

Total deduction – 150000

Net taxable income – 400000

Total tax payable is Rs.7800 (5% on 150000 i.e. 7500 and 4% H&E cess is 300)

Tax liability is Zero as his Net taxable Income is below Rs 500000 and a rebate of Rs.12500 is allowed and he totally saved his tax of Rs.8320 which he paid previous year.

Thanks to Finance Minister Nirmala Seetharaman who had taken into consideration the concerns of persons who are in the low-income bracket, by Increasing Rebate U/S sec 87A from Rs.2500 to Rs.12500 and Raised the limit of Net taxable income from Rs.350000 to Rs.500000/-

About the Author

Prof. Ramprasad                                                                   

He is currently working as an Assistant Professor with Manipal Academy of BFSI, Insurance and Financial Markets and Taxation concepts. Previously he worked as a Business Development executive in Srivijayalakshmi securities and as a Business Development Manager in Appollo Sindhoori capital investments ltd.

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