What is a tax rebate?

The word “rebate” literally means “refund”. Hence Income tax rebate is the refund on taxes if the taxpayer has paid more than the taxable amount. To claim income tax refund, the taxpayer has to file an Income Tax rebate within the specified period.

The term “income tax rebate” has gained popularity after the recent provisions of “Section 87A” of the Income Tax Act in India.

What is rebate u/s 87A?

The rebate under Section (u/s) 87A helps a resident taxpayer to reduce their income tax liability. The only condition to avail the benefit is:

“Your total taxable income shall not exceed the threshold limit.” Meaning - Only taxpayers falling under the specified threshold limit can claim the benefit of rebate under Section 87A.

Rebate under Section 87A for the FY 2019-20 and AY 2020-21

The maximum amount is ₹ 5,00,000. That means that anyone with a total taxable income of more than ₹ 5,00,000 will not be eligible for the Section 87A tax relief, and their tax will be computed at regular rates.

Rebate under Section 87A for the FY 2020-21 and AY 2021-22

Under both the old tax regime and new tax regime, the amount of the tax refund under Section under Section 87A for this year has been kept unchanged.

A resident taxpayer with taxable income up to ₹ 5,00,000 would receive a tax rebate of ₹ 12,500 or the amount of tax payable, whichever is lower.

Rebate under Section 87A for the FY 2021-22 and AY 2022-23]

Under both the old tax regime and new tax regime, the amount of the tax refund under Section under Section 87A for this year has been kept unchanged.

A resident taxpayer with taxable income up to ₹ 5,00,000 would receive a tax rebate of ₹ 12,500 or the amount of tax payable, whichever is lower.

How much rebate is allowed under Section 87A?

A resident taxpayer with taxable income up to ₹ 5,00,000 would receive whichever tax benefit is lower among the following:

  • Rs 12,500

       OR

  • The amount of tax payable

What is total taxable income for claiming rebate u/s 87A?

The total taxable income for claiming rebate under Section 87A

       =

Gross Total Income – deductions under Section 80C to 80U

For example:

To understand the calculation of total taxable income for rebate under Section 87A:

Mr. Sharma, a 28-year old resident individual has:

Total Income

₹ 5,75,000

Life Insurance policy taken under Section 80C

₹ 1,50,000

Health Plans taken under Section 80D

₹ 25,000

What will be the total taxable income of Mr. Sharma for AY 2021-22?

Solution: Total Taxable income of Mr. Sharma will be:

Total Income

₹ 5,75,000

Less: Life Insurance policy taken under Section 80C

₹ 1,50,000

Less: Health Plans taken under Section 80D

₹ 25,000

Total Taxable Income (TTI)

₹ 4,00,000

Since, his TTI is below the threshold limit of ₹ 5,00,000, hence taxpayer Mr. Sharma is eligible for claiming rebate under Section 87A.

How to calculate tax rebate under Section 87A?

The steps for calculating the tax rebate under Section 87A are as follows:

Step 1 – Determine your Gross Total Income (GTI) for the current financial year.

Step 2 – Subtract the tax deductions you are eligible for (under Sections 80C to 80U).

Step 3 – After subtracting the tax deductions, calculate your Total Taxable Income.

Step 4 – Subtract the amount of the tax rebate allowed.

Step 5 – Calculate the amount of Health and Education Cess payable at 4% on your balance tax payable (if any).

Rebate granted under Section 87A will depend upon your taxes payable for the FY 2021-22 (AY 2022-23) as follows:

Tax Payable Rebate under Section 87A

Less than Rs 12,500

Equal to the tax amount payable

Exactly Rs 12,500

Rs 12,500

More than Rs 12,500

NIL

Let us consider an example to understand the calculations better:

Suppose the Total Taxable Income (TTI) for Mr. Sharma is:

  • Rs 4 lakhs
  • Rs 5 lakhs
  • Rs 6 lakhs

Calculation of tax rebate under Section 87A and Tax payable for the FY 2021-22 (AY 2022-23)

Particulars Amount (1) Amount (2) Amount (3)

Total Taxable Income (TTI)

4,00,000

5,00,000

6,00,000

Less: Basic Exemption Limit

2,50,000

2,50,000

2,50,000

Taxable Income after Basic Exemption Limit

1,50,000

2,50,000

3,50,000

Tax Payable

7,500

12,500

32,500

Less: Rebate under Section 87A:

Lower of:

  1. Tax Payable or
  2. Rs 12,500
    subject to condition that Total Taxable Income should not be more than 5,00,000

7,500

12,500

NIL*

Balance Tax Payable

NIL

NIL

32,500

Add: Health and Education Cess at 4%

 -

 -

1,300

Final Tax Payable

 -

-

33,800

*Benefits of rebate under Section 87A is not available because total Income exceeds Rs 5,00,000.

Things to Keep in Mind While Availing Tax Rebate u/s 87A

When applying for a Section 87A rebate, keep the following points in mind:

  • Non-resident Indians (NRIs) are not eligible for the tax rebate under Section 87A
  • Corporations, firms, and HUFs are not eligible for the benefits of this tax rebate.
  • Senior citizens (aged 60 to 80) are eligible for this tax rebate. However Super Seniors citizens (aged 80 and up) are not eligible for this tax rebate.
  • Before adding a 4% health and education cess, the rebate can be applied to the total tax.
  • Residents are the only ones who are eligible for a rebate under Section 87A.
  • The amount of the rebate will be the lesser of the specified Section 87A limit (i.e., Rs 12,500) or the total income tax due (before cess).
  • Under both the old tax regime and new tax regime, the Section 87A rebate is available.

Rebate u/s Section 87A against Various Tax Liabilities

The Section 87A rebate can be used to the claim against the following tax liabilities:

  • Normal incomes that are taxed at the slab rate.
  • Section 112 of the Income Tax Act applies to long-term capital gains. (Long-term capital gains on the sale of any capital asset other than listed equity shares along with the equity-oriented mutual funds are subject to provisions mentioned under Section 112).
  • Under Section 111A of the Act, short-term capital gains on the listed equity shares and the equities-oriented mutual fund schemes are taxed at a flat rate of 15%.

Note that the Section 87A rebate cannot be used to reduce taxes on long-term capital gains on equity shares and equity-oriented mutual funds (Section 112A).

Rebate u/s 87A for Previous Years

The Government of India from the Financial Year 2013-14 announced the tax rebate under Section 87A. Since then the limits have witnessed the following changes:

Financial Year Limit on Total Taxable Income Amount of rebate allowed u/s 87A*

2019-20

Rs. 5,00,000

Rs. 12,500

2018-19

Rs. 3,50,000

Rs. 2,500

2017-18

Rs. 3,50,000

Rs. 2,500

2016-17

Rs. 5,00,000

Rs. 5,000

2015-16

Rs. 5,00,000

Rs. 2,000

2014-15

Rs. 5,00,000

Rs. 2,000

2013-14

Rs. 5,00,000

Rs. 2,000

*Rebate amount allowed under Section 87A may be lower of limits specified above or the amount of tax payable.

Conclusion

The tax rebate under Section 87A was created with the intention of providing help to taxpayers in the lowest tax bracket. With the creation of this section, the government was able to provide direct benefit to the required Section while not lowering the overall tax rates. The evidence for this can be seen in the constantly shifting limits of the Section 87A.

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