Mr. Pranab Mukherjee has exempted earnings upto Rs. 1.8 Lacs from taxes. So what’s the end effect of the increase in tax slab? Rs. 2000 lower tax, for anyone with annual salary of Rs. 1.8L and above.

There was lot of confusion with even some of the learned minds in calculating the tax benefits. What is the rate at which this Rs. 20,000 increase in slab would have been taxed? 30%, greater than 30% or 20% or the “effective tax rate” (just divide your actual tax amount in last payslip by annual salary for this). None of it – it will be 10% of the Rs. 20,000. And, by the way, this Rs. 20,000 increase in slab does not cascade for all other slabs. The buck stops at the base slab :) Let me explain here.

Check the existing and proposed tax slabs and tax rates below. The only change is highlighted in yellow and red.

Tax Slab 2010-2011 Tax Rate 2011-2012 Tax Rate
0 – 1,60,000 0% 0%
1,60,001 – 1,80,000 10% 0%
1,80,001 – 5,00,000 10% 10%
5,00,001 – 8,00,000 20% 20%
8,00,001 – your salary amount 30% 30%

 

If that didn’t explain, read on: Existing slabs and tax rates are: 0-1.6L – 0%; 1.6L-5L– 10%; 5L-8L – 20%; above 8L – 30%; So basically what Mr. Pranab has done is to squeeze the 10% bucket to 1.8L to 5L instead of 1.6L to 5L, so you will save 10% on the Rs. 20,000 (1.6L to 1.8L) which will not be taxed.

And, by the way, if you are from the fairer sex, none of this discussion is for you as your tax exempt slab already was Rs. 1,90,000 in FY 2010-2011 ;)

Yes, numbers lie too! Don’t confuse yourselves with Rs. 20,000 increase in slab. Thank Mr. Mukherjee for the 2K that will you can pocket sometime before April 2012. Getting a bit more technical, if u r going to have ur dinner on him tonight don’t spend more than Rs. 1,818. That’s Rs, 2000 discounted at 10% per annum – net present value of Rs. 2000 in April 2012 as on today (subject to lot of assumptions)!

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