Tax Rebate under Section 87A

About

The Income Tax Act of 1961 governs the imposition, administration, collection, and enforcement of income tax in India. The act consists of various sections, each addressing a specific aspect of income tax law. One of these sections is Section 87a, which was added in the Finance Act of 2013. It was designed to offer tax benefits to individuals with a total net income of less than Rs.5,00,000. The New Tax Regime in the budget saw an increase in the Section 87a tax rebate from Rs.5 lakh to Rs.7 lakh.

The 2023 budget announces a new tax regime with a tax-free threshold of Rs 7 lakh for individuals for tax rebate under section 87A. This should not be confused with the basic exemption limit, which has been increased to Rs 3 lakh. Income above Rs 3 lakh is taxable, but as long as it does not exceed Rs 7 lakh, no taxes are owed, thanks to the Section 87A tax rebate under the Income-tax Act, 1961.

Section 87A Rebate Considerations:

• → The rebate is applied to the total tax, excluding the 4% health and education cess.’
• → Only resident individuals are eligible.
• → Senior citizens between 60 and 80 years of age are eligible for the rebate.
• → Super senior citizens over 80 years of age cannot claim the rebate.
• → The rebate amount will be either the limit specified under Section 87A or the total income tax payable (before cess), whichever is lower.
• → The rebate is available under both the old and new tax regimes

Section 87A Rebate Eligible Tax Liabilities:

• → Normal income taxed at slab rates
• → Long-term capital gains taxed under Section 112 of the Income Tax Act (applicable to long-term capital gains from the sale of capital assets other than listed equity shares and equity-oriented mutual funds)
• → Short-term capital gains on listed equity shares and equity-oriented mutual funds taxed at a flat rate of 15% under Section 111A of the Act.

Note: The Section 87A rebate cannot be applied to tax on long-term capital gains on equity shares and equity-oriented mutual funds (Section 112A).

Steps to claim tax rebate under Section 87A

If you are opting for the old tax regime

Step 1: Determine your gross income from all sources.

Step 2: Subtract all applicable deductions, such as the Section 80CCD (2) employer contribution to the NPS account (available in FY 2022-23) and the standard deduction of Rs 50,000 for salaried employees (available starting in FY 2023-24).

Step 3: Calculate your net taxable income by subtracting all deductions from your gross taxable income. If your net taxable income is less than Rs 7 lakh, you qualify for the Section 87A tax rebate and will not owe any taxes, which will be reflected automatically on your tax return.

If you are opting for the old tax regime

Step 1: Determine your total gross income from all sources.

Step 2: Subtract any eligible deductions, including exemptions such as HRA, LTA, and sections 80C and 80D, as no changes have been made to the income tax slabs or rates under the old tax regime.

Step 3: Calculate your net taxable income by subtracting all deductions from your gross taxable income. If your net taxable income is below Rs 5 lakh, you are eligible for the Section 87A tax rebate and will not owe any taxes, which will be reflected automatically on your tax return under the old tax regime.

Let us take an example to understand the calculations better:

Mr. X, aged 47 years is a salaried resident individual and has opted for a new tax regime.

Suggested Read: Income Tax Slabs For Senior Citizens (FY 2022-23)

Conclusion

In India, the taxes paid by citizens are invested in boosting the nation's economy. The income tax system in India operates on a progressive basis, and as such, the Income Tax Department has established various tax bracket rates for individuals based on their total income. To alleviate

the tax burden on those with low taxable income, the government has established provisions such as claiming an income tax rebate under Section 87A to decrease their tax obligation.

People sometimes attempt to avoid paying taxes by concealing their true income, but this can result in significant penalties, including fines and jail time. It is wise for individuals to educate themselves on tax laws and file their returns accordingly. The tax laws are updated annually for the benefit of the public.