Income Tax Rebate Under Section 87A

Understanding Income Tax Rebate under section 87A

The government has set up provisions to reduce the tax liability, like claiming income tax relief under section 87A of the income tax act, which aims to ensure taxpayers with low taxable income do not face the burden of paying more taxes. This rebate helps taxpayers to reduce their tax liability. Resident individuals can claim the rebate of ₹ 12,500 or ₹ 25,000 based on the tax regime and income criteria. In this article eligibility to claim, calculation of rebate and other relevant matters are discussed.

Eligibility to claim rebate under Section 87A of the Income Tax Act:

• Must be a resident individual taxpayer of India
• Total income of the individual after deducting eligible deductions under chapter VI-A, below ₹5,00,000. This limit is increased to ₹ 7,00,000 for the new tax regime from AY 2024-25
• Rebate is available to only an Individual & not to any Firm or Company or HUF.
• Senior citizens can also avail the benefit of the rebate
• Rebate is available under both the old tax regime and the new tax regime.

This rebate can be claimed against the tax liability in respect of normal income which is taxed at the slab rate, long term capital gains under Section 112 of the Income Tax Act. (Section 112 applies for long-term capital gains on the sale of any capital assets other than listed equity shares as well as equity oriented schemes of mutual funds.) This rebate can also be availed against the tax liability for short-term capital gains on listed equity shares, equity oriented schemes of mutual funds under Section 111A, on which tax is payable at flat rate of 15%.

Rebate under Old Tax Regime

Tax rebate for FY 2022-23 (AY 2023-24) remains unchanged. If your taxable income is up to ₹ 5,00,000, you can get a maximum tax rebate of ₹ 12,500.

Rebate under New Tax Regime

To make the new tax regime more lucrative, several amendments are proposed in budget 2023. From the FY 2023-24(AY 2024-25)], a resident individual with taxable income up to ₹ 7,00,000 and opting for new tax regime will get a rebate of ₹25,000 or the amount of tax payable (whichever is lower). However, for the old tax regime, the threshold limit will remain the same, i.e. ₹ 12,500 for income up to ₹ 5,00,000.

Incomes Not Eligible for Tax Relief

i. Special Incomes

Special incomes like income from gambling winnings, online gaming wins, virtual digital assets (VDA), betting wins, or game show wins are taxable at flat tax rate of 30% plus surcharge and cess. These incomes are not eligible for tax rebates under Section 87A of the new tax regime.

ii. Long-term capital gain Income:

The rebate provided under Section 87A cannot be claimed against tax on long-term capital gains resulting from the transfer of certain securities under Section 112A of the Income Tax Act, 1961.

In other words, if an individual is having taxable income which qualifies for the tax rebate under section 87A, and also having LTCG from equity shares or equity mutual funds, in this case, he requires to pay tax at a special rate of 10% on the LTCG amount without considering the rebate.

This provision is applicable for old as well as the new tax regime.

For example, if Mr. Ram an individual has a net taxable salary of ₹ 4.3 lakh a year and LTCG of ₹ 1.20 lakh, he pays 10% tax on the LTCG amounting to ₹ 20,000 plus cess @ 4%, total ₹ 2080. The tax payable on the net taxable salary would still be eligible for the rebate under section 87A, reducing their tax liability.

How to Calculate Income Tax Rebate under Section 87A

After the new union budget and introduction of the new tax regime from FY 2023-24 (AY 2024-25), the income tax rebate calculation varies based on whether you have chosen a new or old tax regime.

For the Old Tax Regime

Step 1: Calculate the gross total income, including income from all sources.

Step 2: Deduct deductions and exemptions for which you are eligible, such as 80C, 80D, HRA, LTA, etc.

Step 3: Calculate the net taxable income by subtracting deductions and exemptions from gross total income.

Step 4: If net taxable income is less than ₹ 5,00,000, you are eligible for a tax rebate under Section 87A, which will be automatically considered during return filing.

Step 5: Your tax payable will be zero if your income is ₹ 5,00,000 or below under the old tax regime. And there are no special incomes that are not eligible for the rebate.

For the New Tax Regime

Step 1: Calculate the gross total income, including income from all sources.

Step 2: Deduct applicable deductions under Section 80CCD (2) for the employer's contribution to the employee's NPS account. Salaried employees get a standard deduction of ₹ 50,000 as per section 16.

Step 3: Calculate net taxable income by subtracting applicable deductions from gross total income.

Step 4: If net taxable income is ₹ 7,00,000 or lower, you are eligible for a tax relief under Section 87A, which will be automatically considered during return filing.

Step 5: Your tax payable will be zero if your income is ₹ 7,00,000 or below and there are no special incomes that are not eligible for the rebate.

Marginal Relief under Section 87A For New Tax Regime

As per Section 87A, the tax rebate can only be availed if the total taxable income is less than the prescribed limit. Even though the prescribed limit has been increased under the new tax regime a slight increase in income from ₹ 7,00,000 will not remove the tax rebate benefit due to marginal relief.

The marginal relief for income tax rebate is a new amendment to Section 87A applicable only to the new tax regime. Instead of paying the full tax amount if your income is more significant than ₹ 7,00,000, you can pay only a small amount for the excess income. The tax payable will not exceed the income of more than ₹ 7,00,000. So, the tax you must pay will be less than the difference between your total taxable income and ₹ 7,00,000.

It can be easily understood with the following example:

FAQs

Q1. Can non-resident individuals claim tax rebate under section 87A?
Ans. Rebate u/s 87A is not available to non-resident individuals can claim.

Q2. Is health education cess included while calculating rebate under 87A?
Ans. No, the tax rebate is calculated and availed before adding health and education cess to the total tax liability.

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