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Last Updated : Dec 02, 2016 05:01 PM IST | Source: Moneycontrol.com

Want to deposit Rs 2.5 lakh in bank account? Know IT rule first

Under the Income Tax Act a basic amount that is earned by the individual as taxable income is not subject to any tax.

Arnav Pandya

Many people confuse the Rs 2.5 lakh limit that is present as the basic exemption limit with an additional figure that they can earn without paying any tax. This is especially true when it comes to the question of looking at what would happen if some of the cash amount that they have deposited in their bank account is counted as income for the current financial year. A proper understanding of the distinction will help to prevent the problem of suddenly facing a tax bill later as a wrong calculation will lead to a tax demand cropping up immediately. Here are some details related to this part of the tax working.

Basic exemption limit

Under the Income Tax Act a basic amount that is earned by the individual as taxable income is not subject to any tax. This means that the tax on income starts after a certain level and it effectively leads to the first limit to the income having a zero per cent tax rate. This figure is Rs 2.5 lakh for those who are below 60 years of age and there is no distinction between a male and a female for this purpose. This provides relief for individuals because they know that they need not pay tax from the first rupee that they earn. The way that this is taken into the calculations is that all the taxable income of the individual is lined up and then when looking at the tax to be paid the Rs 2.5 lakh is removed and then the 10 per cent rate is made applicable from this level to the Rs 5 lakh income level.

For example if a person has a taxable income of Rs 2.1 lakh then there is no tax to be paid because this limit is less than the RS 2.5 lakh basic exemption limit. On the other hand if the income is Rs 3 lakh then the first Rs 2.5 lakh has no tax and the remaining Rs 50,000 has a 10 per cent rate which will come to Rs 5,000 plus the 3 per cent cess.

No use

Anyone who is thinking that they have an extra amount of Rs 2.5 lakh that will not lead to any tax payment needs to be a bit careful in their analysis. They first need to check whether they are already using this buffer in their tax calculations and what is the space that they have. Most people who have a higher level of income are already using the full amount of this limit in their tax workings even though they might not realise this separately. For them to think that this is an extra buffer that is present and which they can use is a wrong assumption and this needs to be corrected. It is only someone who does not have high income and the figure is less than Rs 2.5 lakh who can use the available unused limit here.

Additional income

For those who have already used up the basic exemption limit the rise of any amount of additional income will mean that this will be subject to the rate of tax that is currently applicable to them. The rate depends on the total income that they have as taxable because this will show whether the 10 per cent, 20 per cent or the 30 per cent is the figure that they have to pay. The additional income will thus be subject to this rate of tax and there will not be a relief that they can claim somewhere. This is important because it can mean that several of the calculations for many people would need to be reworked.
First Published on Dec 2, 2016 05:01 pm