Income Tax Rebate under Section 87A

Tax planning is an essential aspect of personal finance. Section 87A of the Income Tax Act offers relief to eligible taxpayers by reducing their tax liability. This guide explains Section 87A, its benefits, eligibility criteria, and the steps to claim the rebate.

What is an Income Tax Rebate?

In simple terms, a tax rebate is a reduction in the amount of tax you owe. Instead of paying the total tax liability calculated based on your income slab, a rebate allows you to subtract a specified amount from your taxes, reducing the final amount you need to pay.

What is Income Tax Rebate u/s 87A?

Section 87A of the Income Tax Act offers a tax rebate of up to ₹12,500 for individuals whose net taxable income does not exceed ₹5,00,000. Essentially, if you meet the criteria, you could pay zero tax!

This rebate is directly subtracted from the total tax liability, making it a straightforward benefit.
 

When was Section 87A Introduced?

This tax rebate was introduced in the Union Budget of 2013 as part of an initiative to ease the tax burden on middle-income groups. Over the years, the limits and rebate amounts have evolved to align with changing economic scenarios and inflation.

Section 87A- Then and Now

Here’s a quick look at how Section 87A has transformed since its inception:

Rebate u/s 87A for FY 2021-22 AY 2022-23

For the financial year 2021-22, the eligibility criteria remain unchanged:

• Net taxable income should be ₹5,00,000 or less.
• Maximum rebate allowed is ₹12,500.

This means if your calculated tax is ₹12,500 or less, you can eliminate it entirely using this rebate.As you can see, the government has progressively increased the benefits under this section, making it more impactful for taxpayers.
 

Rebate u/s 87A for FY 2024-25 (AY 2025-26)

Section 87A provides a rebate to individual taxpayers whose income does not exceed a specified threshold.

• Under the New Tax Regime: The rebate is applicable for taxable income up to ₹7 lakh.
• Under the Old Tax Regime: The rebate applies for taxable income up to ₹5 lakh.

In both cases, eligible taxpayers' net tax liability is reduced to zero.

How Much is the Rebate Allowed u/s 87A?

1. New Tax Regime:
Taxable income ≤ ₹7 lakh: Maximum rebate of ₹25,000 or total tax liability, whichever is lower.
Taxable income slightly exceeding ₹7 lakh: Tax limited to the income exceeding ₹7 lakh.
2. Old Tax Regime:
Taxable income ≤ ₹5 lakh: Maximum rebate of ₹12,500 or total tax liability, whichever is lower.
 

Eligibility Criteria to Claim Income Tax Rebate u/s 87A for FY 2020-21 and FY 2019-20

Eligibility is consistent across these years:

• You must be a resident individual (not applicable for companies, firms, or NRIs).
• Your net taxable income should not exceed ₹5,00,000.
• The rebate applies to the calculated tax amount only, not to cess or surcharges.

Example of Calculation of Rebate under Section 87A for an Individual below 60 Years

Let’s illustrate this with an example:

Ravi, a resident individual, earns ₹6,50,000 annually. After claiming deductions of ₹1,50,000 under 80C, his taxable income is ₹5,00,000.

Tax on ₹5,00,000: ₹12,500
Rebate under Section 87A: ₹12,500
Final Tax Payable: ₹0

Notice how the rebate completely wipes out his tax liability?
 

Steps to Claim a Tax Rebate Under Section 87A

1. Calculate Gross Total Income: Include all income sources.
2. Deduct Eligible Tax-Saving Investments: Under Chapter VI-A (e.g., Section 80C, 80D).
3. Determine Taxable Income: After deductions, if your income is within the eligible limit for Section 87A, you qualify for the rebate.
4. File ITR Accurately: Declare income, deductions, and claim the rebate in the Income Tax Return (ITR).

Eligibility Criteria for Section 87A

• Must be a resident individual.
• Taxable income:

FY 2024-25: Up to ₹7 lakh (new regime) or ₹5 lakh (old regime).
FY 2022-23: Up to ₹5 lakh (both regimes).

• The rebate is calculated before adding the 4% Health and Education Cess.

Important Things to Consider About Section 87A

Before you get too excited, keep these points in mind:
1. Rebate is not a refund: If your calculated tax is less than ₹12,500, you can only claim up to that amount. No extra rebate is given as a refund.
2. Eligibility is income-dependent: Only those with a net taxable income of ₹5,00,000 or less can claim this rebate.
3. Not for senior citizens above 60: Individuals above 60 years can benefit from higher exemption limits but not from Section 87A.
4. The rebate is not applicable to non-resident individuals.
5. It applies only to normal income taxed at slab rates.
6. Not applicable to long-term capital gains (LTCG) under Section 112A or other specific tax rates.
7. Claiming the rebate requires choosing the appropriate tax regime.
 

Conclusion

Section 87A offers significant tax relief to individuals with moderate incomes, ensuring financial stability and encouraging compliance. While the new regime offers a higher rebate threshold, the old regime remains beneficial for those maximizing deductions.

Plan wisely, choose the right regime, and file your taxes accurately to maximize benefits under Section 87A!