Is your Income Tax really Zero (Nil) for Rs 5 lakh income?

Update – The Budhet 2023 further revised the new income tax regime and increased the tax-free income limit after Section 87A rebate to Rs 7 lakh. You can read more about the difference in new vs old income tax systems or you can also

Budget 2019 initially proposed something that excited millions of Indians – No income tax on Rs 5 lakh income.

It seemed that the zero percent (0%) income tax slab was indeed increased to Rs 5 lakh in India.

But when actual details emerged, the reality was a little different.

If you still aren’t sure about this whole zero tax 5 lakh thing or are looking for answers, then this article might help.

What really happened is something like this:

Individuals with taxable income of up to Rs 5 lakh will get full tax rebate under section 87A. What this means is that if your net taxable income is up to Rs 5 lakh, then you don’t need to pay any taxes. However, if the net taxable income is above Rs 5 lakh, then the rebate under Section 87A cannot be availed.

But, there are no tax slab changes in the Budget 2019.

The only thing that has changed is the tax rebate under Section 87A – which has been revised; and it’s because of that alone, that there will be no tax liability for those whose taxable income is less than or equal to Rs 5 lakh (Rs 5,00,000) in India.

If this sounds a little confusing, then let’s go step-by-step and it will be crystal clear to you by the end.

Income Tax Slabs FY 2019-20 (AY 2020-21)

As I said, there hasn’t been any revision in the income tax slabs from the previous year. It remains the same the for Financial Year 2019-20 as follows (for individuals below 60):

This simply means that, currently:

• Taxable income up to Rs 2.5 lakh has zero (nil) tax.
• Taxable income between Rs 2,50,001 to Rs 5,00,000 taxed at 5%
• Taxable income between Rs 5,00,001 to Rs 10,00,000 taxed at 20%
• Taxable income above Rs 10,00,000 taxed at 30%
• In addition to the above, following are also applicable: 10% surcharge on income tax if Rs 50 lakh < income < Rs 1 crore and 15% surcharge on if the total income > Rs 1 crore.
• 4% Health & Education cess on income tax (including surcharge) to be added.

Remember, we are talking about the ‘Taxable Income’ here and not ther ‘Gross or Total Income’. The ‘net taxable income’ is the total income reduced by the amounts of permissible deductions under various sections (like Section 80C, etc.).

I know you might be thinking – if the tax exemption limit is still Rs 2.5 lakh, then how can there be zero tax on income of up to Rs 5 lakh?

Your curiousity is correct.

And the reason is hidden in the changes made in the Section 87A during the Budget 2019.

Revised Tax Rebate – Section 87A

What has happened is that the limits specified earlier in Section 87A have been revised. The changes are as follows:

Earlier: If the taxable income is less than Rs 3.5 lakh, then a rebate of Rs 2500 applies to the total tax payable (before cess). And if the tax payable is less than Rs 2500 then the entire tax amount is discounted.

Now (after Budget 2019): If the taxable income is less than Rs 5 lakh, then a rebate of Rs 12,500 applies to the total tax payable (before cess). And if the tax payable is less than Rs 12,500 then the entire tax amount is discounted.

So the earlier limit of Rs 3.5 lakh has been revised upwards to Rs 5 lakh. And the rebate available has been increased from Rs 2500 to Rs 12,500. Remember, that a rebate is the specified amount of tax that the taxpayer is not liable to pay.

Here is simple example to show the working

How Income Tax is Zero (nil) on Rs 5 lakh income?

Suppose, your net taxable income is Rs 5 lakh.

As per the tax slabs, calculated normal tax liability is as follows:

• 0 to Rs 2.5 lakh – 0% – Nil
• Rs 2.5 lakh to Rs 5.0 lakh – 5% of Rs 2.5 lakh – Rs 12,500
• (ignoring cess, etc. for simplicity)

So the total tax = 0 + Rs 12,500 = Rs 12,500

But, the revised Section 87A limits offer a rebate of Rs 12,500 for taxable income of up to Rs 5 lakh.

Result

Tax of Rs 12,500 – Rebate of Rs 12,500 = Zero Tax.

That is, if the net taxable income is Rs 5 lakh or less, then the entire tax liability will be less than the rebate of Rs 12,500 – which means effectively no (zero) tax on income up to Rs 5 lakh.

So you can say that the so called zero tax is applicable only for those whose taxable income is Rs 5 lakhs or less.

But what happens in case taxable income is more than Rs 5 lakh?

Let’s see…

Income Tax on income above Rs 5 lakh

If you wish to calculate income tax on your net taxable income above Rs 5 lakh, then let’s take an example to understand it.

Suppose, your total income is Rs 7 lakh.

You do some smart tax saving (use PPF and/or use home loan tax benefits) and become eligible for deductions of full Rs 1.5 lakh under Section 80C.

Now your taxable income comes down to Rs 5.5 lakh (Rs 7 lakh – Rs 1.5 lakh).

Let’s calculate the taxes now…

• Up to Rs 2.5 lakh – NIL
• Rs 2.5 lakh to Rs 5.0 lakh – Rs.12,500 (i.e. 5% of Rs 2.5 lakh)
• Rs 5.0 lakh to Rs 5.5 lakh – Rs 10,000 (i.e. 20% of Rs 0.5 lakh)

Total tax = Nil + Rs 12,500 + Rs 10,000 = Rs 22,500.

Since your taxable income is Rs 5.5 lakh, which is not less than Rs 5 lakh, you are not eligible for the rebate under Section 87A of the Income Tax Act.

So your tax liability remains as Rs 22,500 and you have to pay the full amount. Sorry! But you can still be wise about tax planning by giving priority to your investment planning.

It makes sense to repeat that the rebate is available only if taxable income is Rs 5 lakh or less. Not if it’s above it.

Had you by some means been able to further reduce your taxable income to less than Rs 5 lakh (in above example of Rs 7 lakh total income), you would have become eligible for the rebate of Rs 12,500.

So that’s it…

There has been no change in income slab or tax rates in Budget 2019. Only the limits in the Section 87A have been revised to benefit those whose taxable income is less than Rs 5 lakh.

Individuals with taxable income of up to Rs 5 lakh will get the full tax rebate under section 87A. This effectively means that they will not be required to pay any taxes. However, for those whose net taxable income is above Rs 5 lakh, there is not tax rebate that they can avail.

I hope this article clarifies your doubts about how income of Rs 5 lakh is tax free and what is the zero percent (0%) income tax slab in India.