Some People Pay No Tax Because Of Rebates. Do You Qualify?

The government, in a bid to protect the small taxpayer, provides a rebate on income tax up to a certain threshold. As a result, if you qualify for the rebate, you will pay no income tax. This value depends on the tax regime you choose.

Often, rebates are confused with the lowest income tax slab, which attracts no tax.

Here’s how it works:

The threshold or income limit for availing tax rebate is Rs 7 lakh under the new tax regime.

What this means is that individuals with a gross income of Rs 7.5 lakh effectively pay no income tax. This is because the taxable income in this case stands at Rs 7 lakh after the standard deduction of Rs 50,000—the only deduction available under this simplified regime.

If, however, the taxable income crosses the Rs 7 lakh threshold—even by a rupee—the taxpayer will need to pay tax based on the slab rate.

As an illustration, an individual with a gross income of Rs 8.5 lakh would have a taxable income of Rs 8 lakh. Here, because the taxable income is in excess of Rs 7 lakh, the individual would pay tax based on the slab rate.

Based on the slabs in the new tax regime, the income on the first Rs 3 lakh is 0%. Income above Rs 3 lakh and up to Rs 6 lakh is taxed at 5% and income above Rs 6 lakh and up to Rs 8 lakh is taxed at 10%.

The rebate under the old tax regime was raised to Rs 12,500 on taxable income up to Rs 5,00,000 during the Union budget in 2020.

As an illustration, an individual with a gross income of Rs 6 lakh who makes investments in tax-saving instruments under Section 80C of up to Rs 50,000 would be able to bring their taxable income to Rs 5 lakh after taking into account the standard deduction of Rs 50,000.

Here too, like in the case of the New Tax Regime, if taxable income rises above Rs 5 lakh, the rebate is not applicable.

A point to note is that in both tax regimes, the rebate is only available on income from regular sources and not on other income like capital gains.