Section 88 junkies to get cold turkey

Tax slabs raised:

There are three tax slabs as before, but the threshold limit has gone up. Taxable incomes upto Rs 1 lakh pay no taxes. Those earning between Rs 1 lakh and Rs 1.5 lakh pay 10.2 per cent. Those earning between Rs 1.5 lakh and Rs 2.5 lakh pay 20.4 per cent. Incomes of above Rs 2.5 lakh are taxed at 30.6 per cent (the cess at 2 per cent raises the basic slabs of 10, 20 and 30 per cent). Incomes beyond Rs 10 lakh pay another 10 per cent.

Hacking away the jungle:

Instead of putting your money in several different instruments to take advantage of the various exemptions, deductions and rebates, there is now a simple formula. You can get upto Rs 1 lakh a year knocked off from your taxable income by putting your money in any of the instruments that you were using earlier—PPF, NSC or in a notified pension plan.

Instead of first giving you an exemption, then a deduction on gross income and a rebate on the tax calculated, there is one simple tax umbrella: you save Rs 1 lakh in these products and get the entire amount removed from your taxable income.

Total impact on your money:

Happy news at last for the salaried class—the tax threshold is higher and people across different slabs pay less tax (see table). For example, If you earn a gross of Rs 3.5 lakh and manage to save Rs 1 lakh during the year in the specified instruments, your taxable income is now Rs 2.5 lakh. Another Rs 10,000 as a medical insurance premium reduces your taxable income to Rs 2.4 lakh.

Now you pay tax on this amount. The first Rs 1 lakh is tax free. The next Rs 50,000 is charged a tax of Rs 5,000 plus cess. The next 90,000 is taxed at 20 per cent, that is Rs 18,000 plus surcharge. You pay a total of Rs 23,000.

Till now you were paying about Rs 50,000, after most deductions and full rebates. You are better off in all tax slabs, irrespective of Section 88 having vanished.

For the women:

The Rs 5,000 rebate on tax is gone, but their threshold level rises to Rs 1.25 lakh. The first Rs 1.25 lakh of income is tax free. The Section 88 rebate of Rs senior citizens is gone too, but their overall tax free income rises to Rs 1.5 lakh.

And if you are a Section 88 junkie, have no fear, your favourite tax umbrella has just changed its form. You still get a tax shelter but need to spend less time in understanding it.