Confusion related to Income Tax Computation

Financial Year end is nearing, this is the time when tax planning should be done.

Many people with an income of more than Rs. 7 lakhs still believe that, they need not required to pay tax on income of 7 lakhs and need to pay tax on income which is above Rs. 7 Lakhs only. Let me break it to you, this is not the case.

Confused?

Let's understand why it is not the case.

New Tax Slabs:

Following is the tax slab applicable for income earned in the Financial year 2023-24:

Total Income	Rate
Upto Rs. 3,00,000	Nil
Rs. 3,00,001 to Rs. 6,00,000	5%
Rs. 6,00,001 to Rs. 9,00,000	10%
Rs. 9,00,001 to Rs. 12,00,000	15%
Rs. 12,00,001 to Rs. 15,00,000	20%
Above Rs. 15,00,001	30%

These rates are as per the New Tax Regime under section 115BAC, which is the default regime for all assesses. But you have the option to opt out of it and go for Old Tax Regime where the Basic Exemption limit is Rs. 2.5 Lakhs.

For more details you can through the details article here.

Now coming back to New Tax Regime, Upto Rs. 3 Lakhs, no tax needs to be paid. This is called as Basic Exemption Limit.

But we also get the benefit of Rebate under Section 87A, which exempts the tax upto Rs. 7 Lakhs.

But now comes the question what is Rebate?

Rebate Provision says that a tax amount of

Rs. 25,000 or Actual Tax Amount, whichever is lower

will be exempt. But if the tax amount is above Rs. 25,000 then whole tax amount shall be payable.

Let us understand this with an example.

Let’s say Mr. Abhay has an income of Rs. 6,95,000 (which is below Rs. 7 Lakhs), and Mr. Babu has an income of Rs. 7,10,000 (Which is above Rs. 7 lakhs)

Now what would be there Tax Liability?

For Mr. Abhay,

• On first 3 lakhs tax would be Nil.

• On the next 3 Lakhs is taxable @ 5%, i.e., Rs. 15,000

• On the next Rs. 95,000 @ 10% i.e., Rs. 9,500.

Total Tax Liability of Mr. Abhay is Rs. 24,500 (i.e., 15,000 + 9,500)

As we can see tax amount is less than Rs. 25,000, therefore whole amount of Rs. 24,500 will be exempt and Mr. Abhay need not pay any tax.

Now Mr. Babu having an income of Rs. 7.1 Lakhs will pay:

• On First 3 lakhs – Nil

• On next 3 Lakhs @ 5% i.e., Rs. 15,000

• On next 1.1 lakhs @ 10% i.e., Rs. 11,000

Total Tax Liability of Mr. Babu is Rs. 26,000 (i.e., 15,000 + 11,000)

But rebate provision exempts only the amount that is below Rs. 25,000. But because Mr. Babu’s Tax Amount is above Rs. 25,000, he needs to pay whole of the tax amount of Rs. 26,000 + 4% Health and Education Cess.

The Final Tax Liability of Mr. Babu would be Rs. 27,040 (i.e., 26,000 + 4%)

If I have to summarise it in simple terms, till an income of Rs. 7 Lakhs, a person need not pay any tax. But if the income increase by Rs. 1 i.e., Rs. 7,00,001 then he need to pay the tax on the amount computed as per slab rates.

For any doubts in computing your tax liability, please comment down below. We would be happy to address your doubts.