PM Modi’s tax exemption can bring 90% individuals out of tax net

by Sumeet Mehta

In his last Budget, which is also the Interim Budget before the elections, Prime Minister Narendra Modi has delivered a masterstroke. He proposed an amendment in Section 87A of the Income Tax Act, 1961 to enhance tax rebate from Rs 3,500 to Rs 12,500.

Also, the income limit is proposed to be increased from Rs 350,000 to Rs 500,000. This provision means that any person with an income of Rs  500,000 would have an initial tax liability of Rs 12,500, but after accounting for tax rebate of Rs 12,500 under Section 87A the said person would not have to pay any tax.

Before we delve deeper in this subject, we need to demystify a few Income Tax jargons. The taxpayer has to disclose his income under five heads of income, viz. Income from Salaries, Income from House Property, Income from Business and Profession, Income from Capital Gains and, finally, Income from Other Sources. The sum total of all these incomes is called Gross Total Income.

From this Gross Total Income, the taxpayer gets deduction under various sections of Chapter VI-A for investments in medical insurance (Section 80D), life insurance, bank fixed deposits, National Savings Certificates, etc (Section 80C), National Pension Scheme (Section 80CCD), repayment of education loan (Section 80E), and so on and so forth.

After accounting for the aforementioned deductions under Chapter VI-A, the remaining income that is subject to tax is called Returned Income of Net Taxable Income. Tax is calculated on this Returned Income.

From that tax liability, rebate under Section 87A is deducted and the balance is the final tax payable by the taxpayer.

Now coming back to the subject at hand. The Income Tax department and the Central Board of Direct Taxes share statistics of number of tax returns filed in various income ranges. Based on the numbers shared by Income Tax department and Central Board of Direct Taxes, which are shared in Table 1 and Table 2 below, a quick calculation reveals that a large section of taxpayers will benefit from this single proposal of Prime Minister Modi to make income up to Rs 500,000 tax free.

Table 1 below, shows the number of taxpayers with Returned Income from ZERO to more than Rs 50 crore. Before the proposed increase in rebate under Section 87A of The Income Tax Act, 1961, nearly 3 crore taxpayers or around 60% of the total taxpayers who filed their tax returns, were exempt from taxes.

After the proposed increase in the tax break, the number of tax payers whose income would become exempt from tax would increase to around 3.85 crore which is around 77% of the total number of taxpayers filing their tax returns. This is a significant increase in number of beneficiaries whose income would now become tax-free.

Table 1: Number of tax payers in various income ranges based on Returned Income:

Range (in INR) Returned Income
Number of Returns % of Total
0 1,134,802 2.3%
>0 and <=1,50,000 3,166,687 6.4%
>150,000 and <= 2,00,000 1,743,568 3.5%
>2,00,000 and <=2,50,000 3,736,659 7.5%
>2,50,000 and <= 3,50,000 20,224,674 40.6%
>3,50,000 and <= 4,00,000 3,607,912 7.2%
>4,00,000 and <= 4,50,000 2,466,092 4.9%
>4,50,000 and <= 5,00,000 2,423,686 4.9%
>5,00,000 and <= 5,50,000 1,517,243 3.0%
>5,50,000 and <= 9,50,000 5,766,687 11.6%
>9,50,000 and <= 10,00,000 349,968 0.7%
>10,00,000 and <=15,00,000 1,751,676 3.5%
>15,00,000 and <= 20,00,000 709,295 1.4%
>20,00,000 and <= 25,00,000 373,560 0.7%
>25,00,000 and <= 50,00,000 560,006 1.1%
>50,00,000 and <= 1,00,00,000 202,381 0.4%
>1,00,00,000 and <=5,00,00,000 110,445 0.2%
>5,00,00,000 and <=10,00,00,000 11,293 0.0%
>10,00,00,000 and <=25,00,00,000 6,684 0.0%
>25,00,00,000 and <=50,00,00,000 2,371 0.0%
>50,00,00,000 and <=100,00,00,000 1,320 0.0%
>100,00,00,000 and <=500,00,00,000 1,094 0.0%
>500,00,00,000 277 0.0%
Total 49,868,380 100.0%
Tax Payers who would have ZERO Tax 38,504,080 77.2%
Incremental ZERO-Tax-paying individuals 8,497,690 17.0%

Source: Central Board of Direct Taxes

A detailed analysis of the number of taxpayers who can get into the tax-free net by short-term and long-term tax planning, by availing tax benefits ranging from Standard Deduction on Salaries to tax deduction under Chapter VI-A (explained above) to claiming income tax relief by investing in a house property by borrowing money from a housing finance company or a bank, shows that if a person earning say Rs 10 lakh plans his/her tax properly, then he/she will be able to remain in ZERO tax net.

Analyzing the data of taxpayers who earn a Gross Total Income of up to Rs  10 lakh, we find that around 4.5 crore, or 90% of the taxpayers, can possibly manage to fully avail all tax benefits proposed in this Interim Budget and get into tax free zone.

Table 2: Number of tax payers in various income ranges based on Gross Total Income:

Range (in INR) Gross Total Income
Number of Returns % of Total
0                 922,517 1.8%
>0 and <=1,50,000               2,905,385 5.8%
>150,000 and <= 2,00,000               1,326,333 2.7%
>2,00,000 and <=2,50,000               2,536,062 5.1%
>2,50,000 and <= 3,50,000             14,181,949 28.4%
>3,50,000 and <= 4,00,000               4,409,864 8.8%
>4,00,000 and <= 4,50,000               3,667,534 7.4%
>4,50,000 and <= 5,00,000               3,186,517 6.4%
>5,00,000 and <= 5,50,000               2,408,827 4.8%
>5,50,000 and <= 9,50,000               8,972,323 18.0%
>9,50,000 and <= 10,00,000                 495,137 1.0%
>10,00,000 and <=15,00,000               2,515,650 5.0%
>15,00,000 and <= 20,00,000                 890,398 1.8%
>20,00,000 and <= 25,00,000                 453,925 0.9%
>25,00,000 and <= 50,00,000                 640,980 1.3%
>50,00,000 and <= 1,00,00,000                 214,840 0.4%
>1,00,00,000 and <=5,00,00,000                 116,128 0.2%
>5,00,00,000 and <=10,00,00,000                   11,683 0.0%
>10,00,00,000 and <=25,00,00,000                     6,960 0.0%
>25,00,00,000 and <=50,00,00,000                     2,480 0.0%
>50,00,00,000 and <=100,00,00,000                     1,400 0.0%
>100,00,00,000 and <=500,00,00,000                     1,185 0.0%
>500,00,00,000                        303 0.0%
Total 49,868,380 100.0%
Tax Payers who can have ZERO Tax             45,012,448 90.3%

Source: Central Board of Direct Taxes

This is a big number and with a few proposals in the Interim Budget 2019, Prime Minister Modi has tried to woo and win back the Bharatiya Janata Party’ core vote bank, which is the urban educated middle class.

These proposals attempt to make up to 90% of the tax payers if the tax papers avail all tax-breaks and get a tax-free status. This is a very big number. Only elections results will tell us whether Modi’s strategy to win over middle class voters’ has worked or not.

Sumeet Mehta is a Chartered Accountant and Financial Consultant, author of ‘Diagnosing GST for Doctors’, published by CNBC Books18, and commentator on economic and financial matters. He tweets from @sumeetnmehta