Income up to 3 lakh will remain tax free.

The government has not given any income tax relief to the common man in the interim budget. If you opt for the old tax system, your income up to Rs 2.5 lakh will still be tax free. However, under Section 87A of the Income Tax Act, you can save tax on income up to Rs 5 lakh.

On opting for the new tax regime, you will not have to pay tax on income up to Rs 3 lakh as before. Also under Section 87A of the Income Tax Act, salaried individuals can get tax exemption on income up to Rs 7.5 lakh and others can get tax exemption on income up to Rs 7 lakh.

Consider the old tax system with an example
According to Karthik Gupta, CA, Bhopal, suppose someone has an annual income of Rs 5 lakh. In the old tax system, income up to Rs 2.5 lakh is tax free. In such a case, the individual will be liable to pay tax at the rate of 5% on the remaining Rs 2.5 lakh. That is, he will have to pay a tax of Rs 12,500. But the government waives this tax under Section 87A of the Income Tax Act.

It also has a screw. If your income is more than Rs 5 lakh by even one rupee then you will have to pay tax on Rs 2.5 lakh instead of Rs 1. Now on Rs 2.5 lakh the tax liability at the rate of 5 percent will be Rs 12,500. The remaining Rs 1 will be taxed at the rate of 20 percent. That is, a tax of Rs. 12,501 will have to be paid.

Understand the new tax system with an example
Suppose, if one's annual income is Rs.5 lakhs. In the new tax regime, income up to Rs 3 lakh is tax free. In such a case, the individual will be liable to pay tax at the rate of 5% on the remaining Rs 2 lakh. That is, he will have to pay a tax of 10,000 rupees. But in this regime, the government waives tax on income up to Rs 7.5 lakh under Section 87A.

There is also a catch. If you are a salaried person and your income is more than Rs 7.5 lakh by even one rupee, you will have to pay tax not on one rupee but on Rs 4,50,001. Now after waiving the tax of Rs 3 lakh, out of the remaining Rs 4,50,001, Rs 15,000 will have to be paid at the rate of 5 per cent on Rs 3 lakh and Rs 15,000 at the rate of 10 per cent on the remaining Rs. 1,50,001.

That means the total tax liability will be Rs 30,000. Let us also tell you here that those who do not draw salary, they get the benefit of tax deduction only on the amount up to 7 lakh rupees. In the new tax regime, salaried people get a separate benefit of a standard deduction of Rs 50,000, so their income up to Rs 7.5 lakh becomes tax-free.