Budget 2019: The Personal Finance And Income Tax Explainer  

There is no change in basic tax exemption limits. The rebate (more on that in a bit) doesn’t mean taxpayers eligible for it don’t have to file tax returns.

With these two misconceptions out of the way, here are the important personal finance changes the interim budget 2019 has introduced:

What Is This Rebate That Everyone’s Talking About?

So far, if an individual’s annual taxable income was Rs 3.5 lakh this person was eligible for a concession of Rs 2,500. The concession has now been increased to Rs 12,500 and will be applicable for taxable income up to Rs 5 lakh.

Here’s a simple illustration:

Sheena’s Rebate Calculation (So Far)

• Annual Income: Rs 5 lakh
• MF Investment (tax scheme): Rs 1.5 lakh
• Taxable Income: Rs 3.5 lakh (Rs 5 lakh – Rs 1.5 lakh)
• Tax Slab Exemption: Rs 3.5 lakh-2.5 lakh = Rs 1 lakh
• Applicable Tax: 5 percent of Rs 1 lakh = Rs 5,000
• Applying Rebate: Rs 5,000 – Rs 2,500 = Rs 2,500
• Tax Payable by Sheena: Rs 2,500

Sheena’s Rebate Calculation (Going Forward)

• Annual Income: Rs 6.5 lakh
• MF Investment (tax scheme): Rs 1.5 lakh
• Taxable Income: Rs 5 lakh (Rs 6.5 lakh– Rs 1.5 lakh)
• Tax Slab Exemption: Rs 5 lakh- Rs 2.5 lakh = Rs 2.5 lakh
• Applicable Tax: 5 percent of Rs 2.5 lakh = Rs 12,500
• Applying Rebate: Rs 12,500 – Rs 12,500 = NIL
• Tax Payable by Sheena: NIL

Ready for a slightly more complex calculation?

Let’s increase Sheena’s annual income to Rs 9.25 lakh. If Shenna exhausts all the deductions available to an individual, she still won’t have to pay any tax. Here’s why:

• Annual Income: Rs 9.25 lakh
• Section 80C Investments: Rs 1.5 lakh
• NPS Investment: Rs 50,000
• Mediclaim: Rs 50,000
• Interest Deduction on Housing Loan: Rs 2 lakh
• Taxable Income: Rs 9.25 lakh – Rs 4.5 lakh = Rs 4.75 lakh
• Tax Slab Exemption: Rs 4.75 lakh – Rs 2.5 lakh = Rs 2.25 lakh
• Applicable Tax: 5 percent of Rs 2.25 lakh = Rs 11,250
• Applying Rebate of Rs 12,500
• Tax Payable By Sheena: NIL

Homeowners, Rejoice!

So far, to avoid paying tax on capital gains from a property, the gains could be invested only in one other ready to move-in or under-construction property. Now, this benefit has been extended to two properties. But the capital gain remains capped at Rs 2 crore.

Let’s use a simple illustration: Assume Shenna bought a flat in 2016 for Rs 50 lakh. She sells it in 2020 for Rs 2 crores. Her capital gains from this sale is Rs 1.50 crore (inflation/indexation not applied for simplicity). If this amount isn’t reinvested in another property, Sheena will have to pay 20 percent capital gains tax.

Sheena’s Options (So far)

• She could save this entire Rs 1.50 crore by buying ONE read-to-move in property or under-construction property worth this amount.

Sheena’s Options (Going Forward)

• She can invest this Rs 1.5 crore by buying TWO properties. But this benefit can be availed only once in her lifetime.

Renting Homeowners, Rejoice!

For individuals owning more than one self-occupied house, a notional rent is applicable on any of the properties. This is added to the individual’s income and taxed as per the relevant tax slab. Now, there won’t be any notional rent on the second property.

Let’s say Sheena owns a house in Mumbai and Delhi. Both these houses are occupied by her family members. So far, Sheena would have to pay a notional rent (as per market rate etc) on either one of these properties. She won’t have to anymore.

There’s another relief for home-owners renting their property on the tax deducted at source or TDS as well.

Currently, the TDS threshold for deduction of tax on rent is Rs 1.8 lakh. It will now become Rs 2.4 lakh. This would benefit owners earning a monthly rental income of up to Rs 20,000 from the previous TDS limit of Rs 15,000 per month.

For the impact of these changes on your finances, watch this