New tax regime: Finance Minister of India has given a big relief to the middle class in the budget. He has exempted his annual earnings up to Rs 12 lakh. If the standard deduction of Rs 75000 is also added, the total earnings up to Rs 12.75 lakh will become tax-free.
However, in the new tax regime, the annual income of Rs 12 lakh is still falling into the 10 per cent tax slab. This has led to taxpayers confused about how their income of Rs 12.75 lakh will be tax-free. Let us understand it in detail.
How much tax is levied in the new tax system?
Currently, as per the new tax regime, tax up to Rs 0-4 lakh is zero. At the same time, 5 per cent tax is levied on earnings of Rs 4 to 8 lakh and 10 per cent on earnings of Rs 8 to 12 lakh. Annual income above Rs 24 lakh will be taxed at a maximum of 30 per cent.
How will income of 12.75 lakh be exempt from tax?
Taxpayers get tax exemption under section 87A of income tax. It is Rs 12,500 for the old tax regime and Rs 60,000 for the new tax regime. This simply means that if your tax liability in the new tax system is less than 60 thousand rupees, then you do not need to pay a single rupee in tax.
According to this, your annual income up to 12 lakhs will be exempt from tax. Realise that income of 0-4 lakhs is tax-free. At the same time, 5 per cent will be charged on 4 to 8 lakh. This means that on these four lakhs you will have a tax liability of Rs 20,000. On the next four lakhs i.e. 8 to 12 lakhs, you will have to pay 10 per cent tax, which is Rs 40,000.
This means that you will have to pay a tax of Rs 60 thousand on an annual income of Rs 12 lakh, which the government is directly exempting. If you add a standard deduction of Rs 75 thousand to this, the annual income up to Rs 12.75 lakh will be exempt from tax.
How to get the benefit of tax exemption
To claim tax exemption under section 87A, you have to file an income tax return (ITR). After your ITR is cleared, the discount money will be transferred directly to your account.