Why Income Tax Rebate upto 5 Lacs in Budget 2019 is Wrong at Fundamental level?

As per the Interim budget announced on 1st Feb 2019,

"Individual taxpayers with annual income up to Rs. 5 lakh will get the full tax rebate." 

At first, everyone was happy listening to this news. Everyone started thinking that Income tax slabs are now redefined and 2.5 lacs I-T slab is shifted to 5 Lacks. (i.e you have to pay 0% tax for 0 - 5 lacs slab) but it's not true.

All along the day, everyone was deducing their own meaning out of the above statement. People were confused about what exactly is changed in I-T Slab in Budget 2019.

Many people have taken different numbers in the use cases and showed us how this will be beneficial for all of us irrespective of which tax slab we fall into. But many are still confused.

Index :

1. Changes in Income Tax rules in Budget 2019
2. Details [ Why it is wrong at the fundamental level? ]
3. Video with the explanation
4. More detailed Calculations
5. Real Scenario [ where it affects people ]

Let me help you understand the true fact about the statement related to Income Tax in Budget 2019:

1. Standard deduction limit hiked from Rs. 40,000 to Rs. 50,000. (Hike of Rs. 10,000 for all salaried people):
• This is the change in the Income Tax rule from last year budget which will benefit all salaried employee irrespective of their tax slab. Everyone will be able to save Tax on Rs.10,000 depending on their tax slab.
  
  
• Please don't mix this point with the below-mentioned point. This Blog post is only about below-mentioned 2nd point, which I feel is wrong.
  
  
2. Individual taxpayers with annual income up to Rs. 5 lakh will get the full tax rebate:
• Even though many of you are thinking that you all will save the Tax on your taxable income up to Rs. 5 Lacs, but in reality that is not the case.
  
  
• The people whose Taxable income is up to Rs. 5 Lacs will get the Tax benefit of Rs. 12,500/- compared to Income-tax Rules from the last budget of 2018  (i.e. Rebate of 5% on Rs. 2.5 Lacs)
  
  
• People having Taxable income more than Rs. 5 Lacs will not get any kind of benefit because of this change.

Now many of you will directly scroll down to the comment box to react on this post,
But please have little more patience. Hear me out completely. 

Coming to the point, Why I am saying "The above-mentioned 2nd point about Income Tax in Budget 2019 is Fundamentally & Mathematically Wrong"

Because of this change,

Taxable Income of Rs. 4.99 Lacs  >  Taxable Income of Rs. 5.01 Lacs

Note: Here, ">" indicates Better / Worth more (I will explain it in detail)
  

Just by seeing this, you can say, it feels/looks a little odd and wrong mathematically.

DETAILS:

1. Whose Taxable income is Rs.4.99 Lacs, he/she will get the rebate of Rs.12,500/- (because of the above-mentioned 2nd point)
   
• Rs. 4,99,000 - Rs. 0 = Rs. 4,99,000 (Usable Amount)
  
  
2. People having Taxable income equal to Rs.5.01 Lacs, he/she is not eligible for getting the Rebate of Rs.12,500/-. So, he has to pay more tax of Rs.12,500/-
   
• Rs. 5,01,000 - Rs. 12,500 = Rs. 4,88,500 (Usable Amount)

Ultimately, the person having total Taxable Income of Rs. 4.99 Lacs remain with more amount to spend than the person having total Taxable Income of Rs. 5.01 Lacs.

It's is fundamentally wrong for sure.

I understand that "The people who earn more have to pay more tax than those who earn less"

Till now, 

• Higher earning person always had more take home-salary compared to those who earn less, Irrespective of their tax bracket.
• This fundamental principle should always be satisfied while designing Income Tax policies / Rules.
• Income Tax changes in budget 2019 failed to fulfil this criterion.
  
  

As per Budget 2019, the difference in the Tax amount of above mentioned two people is so large that the person earning more ends up with less amount to spend on himself or his family compared to the other one.

In the above example, I haven't considered any kind of exemption or anything. Some of you will start arguing on that as well.

But, Considering any kind of exemption won't change the picture. Only numbers will change that too in the same proportion. Because All kind of exemption will impact both the people in the exact same way.

I will show you that as well, (scroll down for detailed calculations & Real Scenario)

MORE DETAILED CALCULATION:

1. CASE A:
• Rs. 6,99,999 (CTC) - Rs. 1,50,000 (80C) - Rs. 50,000 (stand. deduction)
  = Rs. 4,99,999 (Taxable Income)
  
  
• Total Tax to be paid = Rs. 0/-
  
  
• Remaining Amount available to spend =  Rs. 4,99,999/-
  (Due to the effect of "Rebate" up to 5 lacs mentioned in point 2)
  
  
2. CASE B:
• Rs. 7,00,001 (CTC) - Rs. 1,50,000 (80C) - Rs. 50,000 (stand. deduction)
  = Rs. 5,00,001 (Taxable Income)
  
  
• Total Tax to be paid = Rs. 12500/-
  
  
• Remaining Amount available to spend =  Rs. 4,87,501/-

Total Difference in Salary = Rs. 2/- only

Total Difference in Tax paid = Rs. 12500/-

Extra Income of Rs. 2/- made the person lose the total amount of Rs. 12,500/-  Just because of the silly change in Income Tax in Budget 2019. 

And the Fun Fact is Most of the People in India including me enjoyed were happy and celebrated this as some kind of festival for the day when it was announced on 1st Feb 2019. 

Some of you might be thinking, this is some hypothetical situation. But Unfortunately, it is not.

REAL SCENARIO:

Just think of 2 friends working in the same IT company at same CTC of around Rs. 6.70 Lacs.

and in the coming appraisal in the March 2019,

• The 1st friend got A-band and got raise in CTC to Rs. 7.05 Lacs
  
  
• The 2nd friend got C-band and got raise in CTC to Rs. 6.95 Lacs. 

Now you answer,

Who will be happy ? 

Should it happen ?

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Thanks & Regards,

-Akshay P Daga