Income Tax Rebate Under Section 87A

A tax rebate is a form of financial relief granted to individual taxpayers, particularly those in lower income groups, to minimize their tax burden if their earnings remain below a specified threshold.

Budget 2025 Update

For the financial year 2025-26, the rebate available under the new tax regime has been increased to Rs. 60,000. This rebate applies to income up to Rs. 12 lakhs under the new tax system. However, the Rs. 60,000 rebates do not extend to income taxed at special rates. Additionally, marginal relief on rebate remains applicable. Read further for more details on this provision.

Income Tax Rebate Under Section 87A

A tax rebate is granted under Section 87A for individuals whose taxable income does not exceed a specified limit. For FY 2024-25 (AY 2025-26), the rebate applies as follows:

• Up to Rs. 7 lakhs under the new tax regime
• Up to Rs. 5 lakhs under the old tax regime

If an individual's taxable income is within these limits, their tax liability is reduced to zero.

Rebate Allowed Under Section 87A

Under the new tax regime, taxpayers with total taxable income up to Rs. 7 lakhs can avail a rebate, which is the lesser of:

1. The total tax payable on their income, or
2. Rs. 25,000

For resident individuals opting out of the new tax regime and having a total taxable income of less than Rs. 5 lakhs, the rebate is limited to:

1. The total tax payable on their income, or
2. Rs. 12,500

Additionally, individuals earning slightly above Rs. 7 lakhs in the new tax regime may benefit from marginal relief.

Marginal Relief on Rebate

When an individual's income slightly exceeds Rs. 7 lakhs, and the tax liability surpasses the excess income over Rs. 7 lakh, marginal relief is granted.

Steps to Calculate Marginal Relief:

1. Determine the excess income: Subtract Rs. 7 lakh from the total income.
2. Compute tax liability: Calculate tax on the total income.
3. Compare tax liability with excess income: If tax liability exceeds the excess amount, rebate equals the difference.

Example:

Mr. Amit, aged 36, is an Indian resident with a total income of Rs. 7,15,000, including salary and interest on fixed deposits. His tax calculation under the new tax regime is as follows:

• Excess income: Rs. 15,000 (Rs. 7,15,000 - Rs. 7,00,000)
• Tax on Rs. 3,00,000 – Nil
• Tax on the next Rs. 3,00,000 @ 5% – Rs. 15,000
• Tax on balance Rs. 1,15,000 @ 10% – Rs. 11,500
• Total tax liability: Rs. 26,500
• Marginal relief: Rs. 11,500 (since Rs. 26,500 - Rs. 15,000 = Rs. 11,500)
• Final tax payable: Rs. 15,600 (including 4% health & education cess)

How to Claim a Tax Rebate Under Section 87A

1. Calculate gross total income.
2. Deduct tax-saving investments and deductions.
3. Determine taxable income after deductions.
4. Report gross income and deductions in the Income Tax Return (ITR).
5. Claim a rebate under Section 87A if taxable income does not exceed Rs. 7 lakh (new tax regime) or Rs. 5 lakhs (old tax regime).

Key Considerations for Claiming Rebate Under Section 87A

• The rebate is applied before adding the 4% health and education cess.
• Only resident individuals qualify for this rebate.
• Senior citizens aged between 60 and 80 years are eligible.
• The rebate is limited to the lower of the tax payable or the maximum rebate amount specified under Section 87A.
• The rebate applies under both the old and new tax regimes.

Applicability of Section 87A Rebate

Rebate under Section 87A can be claimed against:

• Tax on regular income taxed at slab rates
• Long-term capital gains (LTCG) under Section 112 (excluding equity-oriented mutual funds and shares under Section 112A)
• Short-term capital gains on equity shares and mutual funds (taxed at 15% under Section 111A)

Eligibility Criteria for FY 2022-23

For FY 2022-23, the rebate was available to resident individuals with a taxable income of up to Rs. 5 lakhs, with a maximum rebate of Rs. 12,500.

Example:

Ms. Priya, aged 45, has a taxable income of Rs. 4,90,000. Her tax liability before rebate is Rs. 12,000. Since her income is within the Rs. 5 lakh limit, she can claim a rebate of Rs. 12,000, reducing her tax payable to zero.

Rebate Limit for Different Financial Years

Conclusion

Section 87A provides significant relief to taxpayers by reducing their tax liability if their income falls within the specified limit. This provision ensures that individuals with lower earnings are not overly burdened with taxes. The rebate has evolved over the years, benefiting a broader range of taxpayers under the new tax regime. Taxpayers should carefully assess their eligibility and apply the rebate while filing their returns to maximize tax savings.

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 Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.