Income Tax Rebate under Section 87A

Rebate under section 87a is available to resident individuals for Assessment year 2015-2016 given that their total net income does not exceed Rs.5 lakh in an year.

Eligibility to Claim Rebate Under Section 87A

Tax rebates can be claimed under Section 87A, if the following conditions are met:

1. Taxpayer must be resident of India
2. Rebate is restricted to ‘total tax payable’ if the total tax payable is less than Rs.2,000
3. Senior citizens from 60 to 80 years of age are eligible to claim tax rebate under Section 87A.
4. Tax rebate under Section 87A is not applicable for super senior citizens above 80 years of age.
5. Before applying the 4% health and education cess, rebate is applicable to total tax amount.  
6. The threshold limit of Rs.5 lakh under the old regime or Rs.7 lakh for FY- 2023-24 under the new regime, should not be exceeded by the total income after subtracting the deduction. 
7. Both male and female assesses are eligible for the rebate
8. Amended section 87a is applicable from 1st April of that financial year, it is applicable to the assessment year and its subsequent assessment years

How 87A Rebate Works and When it is not applied?

Individual filing Income Tax Return (ITR) under the new tax regime or having income less than Rs.7 lakh is eligible for tax rebate up to Rs.25,000 under Section 87A. For the old tax regime, the maximum rebate amount under Section 87A is Rs.12,500.

How much Rebate can you claim under Section 87A?

For individuals opting for the new tax regime and having a total taxable income of up to Rs.7 lakh, the rebate will be the lower of either the amount of income tax payable on their total income or Rs.25,000. Conversely, for resident individuals shifting out of the new tax regime in the financial year 2023-24, with a total taxable income below Rs.5 lakh, the rebate will be the lower of either the income tax payable on their total income or Rs. 12,500.

Additionally, under the new tax regime, individuals with total income slightly above Rs.7 lakh are also eligible for another rebate. If an individual's income exceeds Rs.7 lakh and the tax payable on that income surpasses the amount over and above Rs.7 lakh, the tax will be capped at the extent of the income exceeding Rs.7 lakh.

Here's how to calculate this rebate:

1. Step 1 – Determine the excess income over Rs.7 lakh: Total income – Rs.7 Lakh (A)
2. Step 2 – Calculate the income-tax liability on the total income (B)
3. Step 3 – If B is greater than A, the rebate under section 87A would be (B - A)

Below is an example illustrating how much tax rebate can be availed under Section 87A for different income levels under the new tax regime for the financial year 2023-24: 

In this example, individuals with a total taxable income up to Rs.5 lakh will receive a tax rebate equal to the amount of tax payable, which is Rs.12,500. For those with a total taxable income exceeding Rs.5 lakh but up to Rs.7 lakh, the rebate remains constant at Rs.25,000, irrespective of their income level within this range.

How to Claim Refund under Section 87a of the Income Tax Act, 1961?

One can claim their refund under Section 87a of the Income Tax Act, 1961 only if their income is less than Rs.5 lakh and their tax liability is more than Rs.2000. The rebate can be claimed while filing the tax return just before adding education cess, secondary and higher education cess.

Steps to Claim a Tax Rebate under Section 87A

The steps to claim a tax rebate under Section 87A are given below:

• The first step will be computing the gross total income for the financial year.
• Check the tax deductions you are eligible for based on your investments, tax savings, etc.
• Check your total income once you reduce the tax deductions.
• File your income tax returns where you will have to declare your tax deductions and gross income.
• If your total income does not exceed Rs.5 lakh for the old tax regime, then you can claim tax rebate under Section 87A. If you have opted for the new tax regime, then you can claim a rebate if the total income doesn’t exceed Rs.7 lakh.
• The maximum amount that you claim as a tax deduction under Section 87A of the Income Tax Act, 1961 is Rs.12,500.

Rebate Against Various Tax Liabilities

The following are the tax liabilities against which rebate can be claimed under Section 87A:

1. As per slab rate, the income calculated as taxable is eligible to be claimed for rebate.

1. Other than listed equity shares and equity-oriented schemes of mutual funds, long-term capital gains under Section 112 of the Income Tax Act are eligible for tax rebate.

1. Tax payable at a flat rate of 15% on short-term capital gains under Section 111A for listed equity shares and equity-oriented schemes of mutual funds is eligible for rebate.

Section 87A Rebate on Special Rate Incomes

Here are some of the details on special rate incomes on Section 87A rebate:

1. Rebate can be claimed on capital gain income

1. Rebate cannot be claimed on long-term capital gains from sale of listed equity shares or mutual funds. Incomes from online gambling, gaming, VDAs, etc., taxed at special are not eligible for rebate.

1. The rebate is applicable for income from short-term capital gains from equity shares.

LTCG from Equity shares and equity mutual funds

1. The Section 87A rebate under either the old or new tax regimes is not eligible for individuals with long-term capital gains (LTCG) from selling equity shares or equity-based mutual funds under Section 112A.

1. LTCG from the sale of listed equity shares or mutual funds is taxed at 10% if it exceeds Rs.1 lakh in a financial year, according to Section 112A of the Income Tax Act. 

Example:

1. If a person has a taxable salary of Rs.3.30 lakh annually and LTCG from sale of equity share of Rs.1.10 lakh, they must pay 10% tax on the LTCG (Rs.10,000) plus a 4% cess which is a total of Rs.1,040).

1. Since the tax on their salary is Rs.4,000 which is below the Section 87A rebate threshold, they can claim a rebate for it, leaving them to pay a tax of only Rs.1,040 on LTCG.

Rebate Under STCG from Equity Shares and Mutual Funds

1. From the sale of equity shares and mutual funds, there is no restriction on claiming rebate on income under Section 87A.

1. Rebate under Section 87A can also be claimed on short-term capital gains from equity shares and mutual funds.

1. Reducing the taxability on individuals in the lowest tax bracket is the main purpose of Section 87A.

1. Direct benefits to low-income taxpayers are provided by the government under this provision without lowering overall tax rates.

Things to Remember while Applying for a Rebate under Section 87A

To claim rebate under Section 87A you must remember certain points before applying for it: 

1. The rebate applies to the total tax liability before adding a health and education cess of 4%.
2. Only resident individuals are eligible to claim the rebate under Section 87A.
3. Senior citizens aged above 60 years but below 80 years can also avail of the rebate under Section 87A.

1. The rebate amount will be the lower of the limit specified under Section 87A or the total income tax payable (before cess).
2. Section 87A rebate is applicable under both the old and the new tax regimes.