Income Tax Rebate Under Section 87A: Maximize your Tax Savings
Updated: 5 days ago
Tax planning is crucial for maximizing savings and reducing your overall tax liability. One of the key provisions introduced by the Indian government to provide relief to taxpayers, especially those in the lower income brackets, is the income tax rebate under Section 87A. This rebate reduces the amount of tax payable for individuals whose taxable income falls below a certain threshold.
For FY 2023-24, under the new tax regime, if your net taxable income is up to Rs. 7,00,000, you are eligible to claim a rebate of up to Rs. 25,000, effectively reducing your tax liability to zero.
In this comprehensive article, we will cover the essential details about the rebate, who qualifies, how to calculate it, and how it differs between the old and new tax regimes.
Table of Contents
Understanding Income Tax Rebate
Taxpayers must understand how a tax rebate differs from tax exemptions and deductions. Tax exemptions refer to cases where the income generated is not subject to tax. You can start by excluding income with tax exemptions for income calculations. Deductions can be claimed for certain expenses and investments. You can subtract the exemptions and deductions from the total income to compute the taxable income.
Tax rebates are entirely different from exemptions and deductions. The income tax rebate is applicable to reduce your tax liability. The income tax is calculated based on the net taxable income, and the rebate applies to reduce the final tax amount. If the total taxable amount meets the threshold value for the rebate, the rebate will apply. Otherwise, there will be no rebate, and you must pay your tax as per the income tax slabs.
Income Tax Rebate under Section 87A
The income tax rebate under Section 87A was first introduced in 2013. It was offered as an incentive for taxpayers to pay their taxes promptly. Since the rebate applies to the final tax amount, it can bring the tax owed down to zero if the rebate covers your total tax. The rebate is applied before the Health and Education Cess is added to the tax calculation.
Ever since tax rebates were introduced, if your taxable income is below the rebate threshold, your tax will automatically become zero. The tax rebate is 100% if the tax amount is below the threshold value. However, if the taxable income exceeds the rebate threshold, the rebate will be nil, and you must pay the full tax amount.
The rebate motivates low-income earners to file tax returns without worrying about tax payments. You need not pay tax if the amount owed exceeds the rebate threshold. Every few years, the rebate threshold limit has been increasing. Following is a short recap of revisions to the rebate from 2013 to 2024:
Rebate under Old Tax Regime
Tax rebate for FY 2022-23 (AY 2023-24) remains unchanged.
If your taxable income is up to Rs. 5,00,000, you can get a maximum tax rebate of Rs. 12,500.
Upto FY 2022-23, the old tax regime is the default regime.
Rebate under New Tax Regime
Rebate limit is increased for FY 2023-24 (AY 2024-25)
If your taxable income is up to Rs. 7,00,000, you can get a maximum tax rebate of Rs. 25,000
Marginal relief is applicable under certain conditions
The new income tax regime is the default regime for AY 2024-25.
If you prefer to follow the new AY 2023-24 tax regime, you can choose the option under Section 115BAC(6).
Who Can Claim Income Tax Rebate Under Section 87A?
The income tax rebate is only available for resident individuals. Other taxpayers, like Hindu Undivided Family (HUF), non-resident individuals (NRIs), and companies, cannot claim tax rebates. Also, super senior citizens who are over 80 years of age are not eligible to claim a rebate.
Incomes Not Eligible For Income Tax Rebate Under New Tax Regime
The new income tax regime has increased the threshold limit for rebates and rebate amounts. However, several other factors, apart from your total taxable income, can determine your eligibility for a rebate. As per the new tax regime, the standard 80C deductions and certain exemptions are not allowed. So, if you follow the new income tax regime, you cannot reduce your taxable income with deductions and exemptions similar to the old tax regime.
To gain eligibility for tax rebates under the new tax regime as per Section 87A, you cannot have income generated from equity shares, equity mutual funds, or other income sources.
LTCG From Equity Mutual Funds And Equity Shares
When your income source includes Long Term Capital Gain (LTCG) from sale units of equity mutual funds or shares of listed equity shares, you cannot claim a rebate under Section 87A for the income from LTCG. Such income is taxed at 10% if it is more than Rs. 1,00,000 in a financial year. However, if income is less than Rs. 1,00,000, it is exempt from tax. Also, you can claim a rebate without restriction when you have LTCG from other assets like real estate, capital assets, or unlisted shares. Also, STCG from the sale of equity shares or equity mutual funds will not limit the rebate you can claim.
Consider this example:
Mr. X has a taxable income of Rs. 3,30,000, less than the 7,00,000 limit. This income also includes LTCG of Rs. 1,10,000 from selling equity shares. Here, the total tax payable is Rs. 4000, less than the rebate amount of Rs. 25,000 as per the new tax regime. However, Mr. X cannot claim the rebate and pay zero tax. They must pay 10% of the LTCG of Rs. 10,000 (1,10,000-1,00,000) along with a cess of 4%, totaling a tax of Rs. 1040. So, their net tax amount is not zero; it is Rs. 1040.
Special Incomes
Special incomes from gambling winnings, online gaming wins, virtual digital assets (VDA), betting wins, or game show wins are not eligible for tax rebates under Section 87A of the new tax regime. A flat tax rate of 30% is applicable on the income, along with an additional surcharge and cess.
How to Calculate Income Tax Rebate under Section 87A
After the new union budget and the introduction of the new tax regime from FY 2023-24 (AY 2024-25), the income tax rebate calculation varies based on whether you follow the old or new tax regime.
For the Old Tax Regime
Calculate Gross Total Income: Add income from all sources.
Apply Deductions: Deduct exemptions and deductions, such as 80C, 80D, HRA, LTA, etc.
Compute Net Taxable Income: Subtract deductions from gross total income.
Rebate Eligibility: If the net taxable income is less than Rs. 5,00,000, you are eligible for the Section 87A rebate.
Zero Tax Liability: If your taxable income is below Rs. 5,00,000, your tax payable will be zero.
For the New Tax Regime
Calculate Gross Total Income: Sum income from all sources.
Apply Deductions: Deduct eligible contributions like employer’s NPS contribution under Section 80CCD (2). A standard deduction of Rs. 50,000 applies for salaried employees.
Compute Net Taxable Income: After applying deductions, if your net taxable income is below Rs. 7,00,000, you can claim the rebate.
Zero Tax Liability: Your tax payable will be zero if there are no special incomes exceeding Rs. 7,00,000.
Examples:
Particulars | Example 1 | Example 2 | Example 3 |
Total Taxable income | 5,00,000 | 7,00,000 | 10,00,000 |
Less: Basic exemption limit | 3,00,000 | 3,00,000 | 3,00,000 |
Taxable income after the basic exemption limit | 2,00,000 | 4,00,000 | 7,00,000 |
Tax payable | 10,000 | 25,000 | 60,000 |
Rebate under Section 87A | 10,000 | 25,000 | Nil |
Balance tax payable | Nil | Nil | 60,000 |
Health and education cess @4% | Nil | Nil | 2400 |
Total tax payable | 0 | 0 | 62,400 |
Marginal Relief under Section 87A For New Tax Regime
As per Section 87A, the tax rebate only applies if the total taxable income is less than the prescribed limit. Even though the prescribed limit has been increased under the new tax regime for FY 2023-24 and AY 2024-25, a slight increase in income from Rs. 7,00,000 will not automatically remove your tax rebate relief 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 Rs. 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 Rs. 7,00,000. So, the tax you must pay will be less than the difference between your total taxable income and Rs. 7,00,000.
It can be easily explained with the following example:
Consider that Mr. X's salary is Rs. 7,70,000 in FY 2023-24, and they have opted for a new tax regime. The standard deduction of Rs. 50,000 will apply, and consider that no other deductions are applicable. So, the total taxable income will be Rs. 7,20,000. This income is Rs. 20,000, more than the prescribed limit of Rs. 7,00,000.
When tax is computed per the new tax regime, the total tax amount is Rs. 27,000. So, does Mr. X have to pay Rs. 27,000 just because their income is slightly more than Rs. 7,00,000? Here is how marginal relief will reduce the total payable tax.
As per the new amendment, Mr. X can get marginal relief as they don't have to pay taxes greater than the excess income. So, they can get a marginal relief of Rs. 7,000 (27,000 – 20,0000). As a result, their total payable tax comes down to 20,000 (27,000 – 7,000).
The marginal relief amount will break even at a taxable income of Rs. 7,77,778, after which there will be no rebate. So, you can get marginal relief if your income is greater than Rs. 7,00,000 and less than Rs. 7,77,779.
If Mr. X's total taxable income is Rs. 8,00,000 for FY 2023-24 as per the new tax regime, their tax liability based on the new income tax slabs is Rs. 35,000. Marginal relief will not apply here as the payable tax is less than the income over Rs. 7,00,000. So, Mr. X has to pay the full tax amount of Rs. 35,000, and an income tax rebate is not applicable.
Key points to remember when claiming marginal relief are:
Marginal relief is applicable for taxpayers for FY 2023-24 with the new tax regime
Income slightly greater than Rs. 7,00,000 can get marginal relief u/s 87A new amendment
You still have to pay the tax, but it will be significantly lower with the rebate
Marginal relief is the difference between tax amount and the amount over Rs. 7,00,000
Conclusion
The income tax rebate under Section 87A is available to provide relief for individual resident taxpayers. The new tax regime has increased the taxable income limit to Rs. 7,00,000 and offers a rebate of Rs. 25,000. Tax relief regarding rebates will reduce the tax burden for low-income taxpayers. Essentially, it will bring down the tax to zero for anyone with an income up to Rs. 7,00,000. This attractive incentive is offered to promote the adoption of the new tax regime, which will be the default tax regime from AY 2024-25. The rebate will be automatically applied when filing income tax returns.
Need help with e-filing of returns? Check out the TaxBuddy to get help from tax experts.
FAQ
Q1. Is income tax rebate available for all taxpayers?
No, income tax rebate is applicable only for resident individuals whose annual taxable income is within the threshold limit. Other entities like HUFs, NRIs, and companies cannot claim this rebate.
Q2. How is rebate calculated under Section 87A while filing income tax returns?
The rebate is automatically applied if your taxable income is under the prescribed limit, reducing your tax liability to zero. As per the new tax regime, no tax is payable when annual income is Rs. 7,00,000 or below.
Q3. Can I claim rebate for income from all sources?
No, under the new tax regime, you cannot claim a rebate for income from certain sources, such as LTCG from equity mutual funds, gambling winnings, and virtual digital assets.
Q4. What is the maximum amount of rebate available under Section 87A?
For FY 2023-24 and AY 2024-25, the rebate is Rs. 25,000 for income up to Rs. 7,00,000 under the new tax regime and Rs. 12,500 for income up to Rs. 5,00,000 under the old tax regime.
Q5. What happens if my income slightly exceeds Rs. 7,00,000 under the new tax regime?
Marginal relief ensures that if your income marginally exceeds Rs. 7,00,000, the tax amount payable will be limited to the excess over Rs. 7,00,000, ensuring you don't pay disproportionately higher taxes.
Q6. Are there specific incomes excluded from claiming the rebate?
Yes, special incomes such as Long Term Capital Gains (LTCG) from equity shares exceeding Rs. 1,00,000, gambling winnings, and income from virtual digital assets are not eligible for the rebate.
Q7. Can senior citizens claim a rebate under Section 87A?
Only resident individuals below the age of 80 are eligible for the rebate. Super senior citizens (those aged 80 and above) are not eligible for this rebate.
Q8. What deductions are allowed under the new tax regime?
Under the new tax regime, standard deduction of Rs. 50,000 for salaried employees and specific contributions such as NPS (Section 80CCD (2)) are allowed.
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