Income Tax Rebate under Section 87A – Detailed Guide

The income tax rebate u s 87A was introduced in 2013. This tax benefit was introduced to relieve certain taxpayer categories.

What is Income Tax Rebate U/S 87A?

Under the old tax regime, a rebate u s 87A is provided if your taxable income does not exceed Rs.5.00 lacs in a financial year. You will be eligible for a tax rebate of Rs. 12,500/- or the income tax liability, whichever is lower. 

Modifications have been made to Section 87A income tax in the new tax regime as well, including enhancements in the threshold limit as well as the amount of rebate. The amount of rebate provided under the Section 87A is Rs. 25,000/- for the FY 2023-24 if the taxable income of a resident individual is within Rs.7.00 lacs. 

Rebate u/s 87A for FY 2021-22, 2022-23, and 2023-24 (AY 2022-23, 2023-24, and 2024-25)

Resident individuals are eligible for tax benefits on the income tax payments for a financial year vide rebate u/s 87A. To qualify for the tax benefit, their taxable income should be within a threshold limit after considering the Chapter VIA deductions, i.e., deductions under various Sections of 80 like 80C, 80D, 80CCD, 80EE, etc.

For FY 2021-22 (AY 2022-23) and FY 2022-23 (AY 2023-24), the threshold limit is Rs. 5.00 lacs. Under both old and new income tax regimes, resident individuals with a taxable income within Rs. 5.00 lacs can claim a rebate u s 87A up to Rs. 12,500/- or the tax payable, whichever is lower.

To make the new tax regime more tax payer friendly, the threshold limit to claim 87A income tax rebate has been enhanced to Rs.7.00 lacs for the FY 2023-24 (AY 2024-25). A resident individual opting to file tax returns under the new tax regime can claim a rebate of Rs. 25,000/- under Section 87A of Income Tax if the taxable income does not exceed Rs.7.00 lacs. However, the threshold limit for the old tax regime remains the same.

Steps to Claim a Tax Rebate Under Section 87A

To claim a tax rebate u s 87A, follow the steps given below:

• Factor your total gross income.

• Minus the tax deductions under Sections 80C to 80U.

• Arrive at the tax liability as per the applicable income tax slab rates. 

• The gross income and tax deductions under Chapter VIA, like House Rent Allowance (HRA), etc., should be disclosed in your IT returns.

• You can claim rebate u s 87A if your taxable income is within Rs. 5.00 lacs for the old tax regime and within Rs.7.00 lacs for the new tax regime.

• The section 87A rebate will be the tax payable or Rs. 12500/Rs. 25000, whichever is lower.

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

The calculation of rebate u s 87A for an individual below 60 years of age is given below, considering the taxable income after deductions under Chapter VIA and the basic exemption limit.

We will take into consideration instances when the —

Total taxable income is Rs. 5.00 lacs
Total taxable income is Rs. 7.00 lacs
Total taxable income is Rs. 10.00 lacs

Calculation as per Old Regime where Maximum Rebate u/s 87A is Rs. 12,500/-

Total taxable income: Rs. 5.00 lacs
Basic exemption limit: Rs. 2.5 lacs
Taxable income after adjusting the basic exemption limit: Rs. 2.5 lacs 
Tax payable: Rs.  12,500
Rebate u s 87A is Rs. 12500 or tax payable whichever is lower.
Hence, Net tax payable after the section 87A rebate is Nil.

Calculation as per New Regime where Maximum Rebate u/s 87A is Rs. 25,000/-applicable from FY 2023-24

Total taxable income: Rs.7.00 lacs
Basic exemption limit: Rs. 3.00 lacs
Taxable income after adjusting the basic exemption limit: Rs. 4.00 lacs
Tax payable: Rs. 25000
Rebate u s 87A is Rs. 25000
Hence, Net tax payable after section 87A rebate is Nil

Total taxable income: Rs. 8.00 lacs
Basic exemption limit: Rs. 3.00 lacs|
Taxable income after adjusting the basic exemption limit: Rs. 5.00 lacs
Tax payable: Rs. 35000

Here. Since the Taxable Income is more than 7 lakhs rebate is not allowed. In simpler words rebate will be allowed only if the taxable income is Rs 5 lakhs or 7 Lakhs as the case may be.

Net tax payable Rs. 35000 + 1400 (education cess at 4%) = Rs. 36400

Since the total taxable income is Rs.8.00 lacs, there is no rebate under section 87A of Income Tax

For accurate calculations of taxable income you can use an income tax calculator.

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

You can claim rebate u s 87A for FY 2020-21 and FY 2019-20 if you fulfil the following eligibility criteria:

• You should be a resident Indian

• Your total income after claiming deductions under Chapter VI A, i.e., Section 80C, 80CCD, 80EE, etc is below Rs 5 lakhs.

• The rebate under Section 87A of Income Tax is restricted to Rs. 12500 or the tax payable, whichever is lower.

• The section 87A income tax rebate will be applied before including the health and education cess of 4%.

Eligibility to Claim Rebate u/s 87A for FY 2018-19 and FY 2017-18

The following conditions applied to qualify for a rebate u s 87A for FY 2018-19 and FY 2017-18:

• The taxpayer should be a resident Indian. 

• After considering the deductions under subsections of 80, i.e., 80C, 80D, 80CCD, 80EE, etc., the total taxable income should be within Rs. 3.5 lacs

• The amount of tax rebate was restricted to Rs. 2500 or the tax payable, whichever was lower. 

• The rebate u s 87A is applied before adding the health and education cess of 4% (FY 2018-19) and 3% (FY 2017-18)

Things to Consider While Availing Rebate under Section 87A

Before availing of rebate u s 87A you should keep the following points in mind:

• Only resident Indians are eligible.

• Super senior citizens aged 80 years and above are not eligible for rebate under the Old Tax Regime as their basic threshold limit is Rs 5,00,000

• Before adding the health and education cess of 4% for the tax payable, you can apply the rebate.

• The lower of the limit permissible under section 87A rebate or the tax payable (before cess) will be considered.

• You can avail the rebate under both old and new tax regimes.

• The tax liabilities under which the rebate can be claimed are:

• The income tax under slab rates

• Long-term capital gains under Section 112 of the Income Tax. Equity-oriented schemes under mutual funds and listed equity shares under Section 112A should be excluded.

• Short-term capital gains on listed equity shares and equity-oriented funds under Section 111A are taxed at a flat rate of 15%.

Conclusion

The rebate u s 87A was introduced to provide relief to the taxpayers belonging to the lowest tax group. With this rebate, direct benefits could be provided to the necessary section without reducing the overall tax rates. Seek the advice of experts and reduce your tax liability by availing of the section 87A tax rebate.

Source: HDFCLife