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What is the tax rebate reform?

The 2019 budget gave individual taxpayers some relief. The Union Minister announced a hike in the standard deduction for the salaried class from ₹40,000 to ₹50,000. In addition to this benefit, the interim budget also proposed an increase in the income tax rebate u/s 87A by ₹ 10,000.

Tax rebate before the reform

Before the tax reforms introduced in the Interim Budget, the old tax rebate scheme was applicable for FY 2018-19. As per the old rules, individual taxpayers were entitled to a maximum rebate of ₹2,500. This rebate could be availed only by those individuals whose total income after deductions under chapter VI-A didn’t exceed ₹ 350,000. For eligible assessees, the rebate would be applied on the total amount of tax payable before charging any cess thereon.

For instance, if the total income tax payable by an individual was ₹1,100 (which is less than the maximum rebate of ₹2,500), then the rebate would be limited to ₹1,100. Alternatively, if the tax payable was ₹3,000 (which exceeds the maximum rebate of ₹2,500), then the assessee would have to pay the remaining tax of ₹500, along with the cess thereon.

However, if the total taxable income of an individual after deductions exceeded ₹350,000, then the tax rebate scheme would not apply. This effectively means that the individual would then have to pay tax on their entire taxable income.

New Rebate Scheme

In the Interim Budget 2019, the Central Government made the welcome move of bringing about favourable tax reforms for the individual taxpayer. This included increasing the income tax rebate under section 87A by an additional ₹ 10,000, thus bringing the maximum rebate up to ₹12,500. Thanks to this measure, individual taxpayers whose total income (after deductions under chapter VI-A) doesn’t exceed ₹5 lakhs don’t need to pay any income tax.

Similar to the old scheme, an individual whose total income after deductions exceed ₹ 5 lakhs, would have to pay tax on the entire taxable income. This new scheme is applicable for the current financial year, ranging from April 1, 2019, to March 31, 2020.

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