The Hindu Business Line : Hurrah from both MIG and HIG

WHILE the middle-income group (MIG) has every reason to be pleased with the sizeable reduction in their income-tax liability, the higher-income group (HIG) can heave a sigh of relief now that the Finance Minister has not gunned after them. The increase in tax-free limit from Rs 50,000 to Rs 1 lakh across the board as against the esoteric upping of this limit last year, coupled with reduction in tax rates, are bound to benefit the middle class.

The vast salaried class would be the greatest beneficiary. The income in excess of Rs 1 lakh but up to Rs 1,5 lakh will now suffer a tax of 10 per cent as against 20 per cent earlier, the income in excess of Rs 1.5 lakh but up to Rs 2.5 lakh will now attract a tax of 20 per cent as against 30 per cent earlier and the maximum rate of 30 per cent would now be reserved only for income in excess of Rs 2.5 lakh.

The abolition of tax rebates under Sections 88, 88B and 88C would not be resented generally though senior citizens (88B) and ladies (88C) may be peeved by the fact that the tax saved by them under the earlier regime was greater.

The tax-free limit of Rs 1.25 lakh for ladies means an effective rebate of only Rs 2,500 (which they otherwise would have had to pay on an income between Rs 1 lakh and Rs 1.25 lakh), whereas Section 88C conferred a rebate of Rs 5,000.

Similarly, senior citizens have now got an effective rebate of only Rs 5,000 with the upping of tax-free limit to them to Rs 1.5 lakh (which they otherwise would have had to pay on an income between Rs 1 lakh and Rs 1.5 lakh), whereas earlier they were entitled to a generous rebate of Rs 20,000. But the reduction in tax rates would spell overall relief for them as well at the end of the day. All that has happened is that these two sections of taxpayers will get a less exclusive treatment.

The replacement of rebate for savings in specified schemes by a deduction from the gross total income will benefit especially those with who were shut from its purview earlier.

Earlier, investments up to Rs 1 lakh begot a tax rebate of 15 per cent assuming one's income was more than Rs 1.5 lakh.

Those with income in excess of Rs 5 lakh were not eligible to any tax rebate in respect of such investments. Now it seems anyone can claim up to Rs 1 lakh as deduction from his gross total income such investments.

Moreover, the sub-limits that obtained under the earlier regime have mercifully vanished.

In the event, a person building a house would not be fobbed of with a rebate on Rs 20,000 even though he might have paid loans back to the tune of Rs 1 lakh.

In other words, the Government is going to be indifferent between investment in PPF and investment in a house property. This is as it should be.

The following case study brings out the impact of the Budget proposals insofar as a salaried man is concerned. Let us say his income from salary before standard deduction is Rs 3 lakh.

His tax liability under the extant and the proposed regime would be as follows:

Present regime

Salary before standard deduction — Rs 3,00,000

Less: Standard deduction — Rs 30,000

Total income — Rs 2,70,000

Tax on this works out to Rs 55,000.

Assuming he utilises the full quota of investment of Rs 1 lakh under Section 88, he would get a tax rebate of Rs 15,000, leaving with a net tax liability of Rs 40,000.

New regime

Salary before standard deduction — Rs 3,00,000

Less: Standard deduction — Nil

Gross total income — Rs 3,00,000

Deduction for investments — Rs 1,00,000

Total income — Rs 2,00,000

Tax liability on this is:

On first Rs 1 lakh — Nil

On Rs 1 lakh to Rs 1.5 lakh — Rs 5,000

And on Rs 1.5 to Rs 2 lakh — Rs 10,000

Total tax liability — Rs 15,000

Thus, there is an effective tax saving of Rs 25,000 (Rs 40,000 minus Rs 15,000) for him. The MIG, small wonder, is the happiest today.

If the MIG is happy the HIG should be relieved. Apart from the inane move to impose a levy of Rs 10 on withdrawals in excess of Rs 10,000 a day, the Finance Minister has left them severely alone.

(The author is a Delhi-based chartered accountant.)

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