A rebate under Section 87A of the Income Tax Act is usually expected by the taxpayers if their total income is below Rs. 7 lakhs. The Government of India introduced the Section 87A tax rebate in the 2013-14 financial year to offer relief to individual taxpayers. This rebate allows eligible taxpayers to reduce their tax liability if their income falls below a specified threshold.
Eligibility Criteria
- Non-Resident Indians (NRIs) are not eligible for the Section 87A rebate. Only resident individuals can avail of this benefit.
- Resident individuals earning from agricultural sources can claim the rebate under Section 87A, provided their total taxable income is below ₹5,00,000.
The rebate under Section 87A helps individuals to reduce their tax liability or even completely eliminate it, it is a significant relief provided to the people with lower taxable incomes. Even though the relief is provided, it is important to be qualified in the eligibility criteria and file an income tax return at the correct time to be able to take advantage of the benefit given to the people who are eligible for the same.
What is Section 87A Tax Rebate?
Section 87A of the Income Tax Act provides relief to taxpayers by allowing a rebate on their tax liability if their total income is below a certain amount. Under the new tax regime, individuals with a total income up to Rs 7 lakh can avail of a rebate, reducing their tax liability to zero. Under the old tax regime, the rebate applies to those earning up to Rs 5 lakh, with a maximum rebate of Rs 12,500.
According to CA Swapnil Patni, Founder of SPC Edutech, “If an individual’s total taxable income is up to Rs 7 lakh and chooses the new tax regime, they will be eligible for rebate of
- An amount of income tax payable on his total income or
- An amount up to Rs 25,000 whichever is lower.”
“In the old tax regime in case of a resident individual, whose total income does not exceed Rs 5 lakh there is rebate of 100 percent of income tax subject to a maximum of Rs 12,500,” according to the income tax department website.
Still, not everyone under the said threshold is allowed to have a tax rebate.
Evolution of the Section 87A Rebate
The rebate amount and the income threshold have changed several times since its introduction.
- 2013-14: Introduced with a rebate of ₹2,000 for income up to ₹5,00,000.
- 2016: Increased to ₹5,000.
- 2017: Rebate set at ₹2,500 for income up to ₹3,50,000.
- 2019: Income threshold increased to ₹5,00,000, and the rebate was raised to ₹12,500.
Key Scenarios Where 87A Rebate can be Denied?
- Long-Term Capital Gains (LTCG) Income: Even if your total income is below Rs 7 lakh, no rebate under Section 87A will be available if a portion of that income is from long-term capital gains (LTCG) on listed equity shares or equity-oriented mutual funds. According to tax law, LTCG above Rs 1 lakh is subject to a 10% tax, and this portion of income is not eligible for the rebate.
Example: Suppose you have a salary income of Rs 4.5 lakh and LTCG income of Rs 1.5 lakh. While the Rs 4.5 lakh from salary is eligible for a rebate, Rs 50,000 from LTCG will attract a 10% tax, as LTCG income up to Rs 1 lakh was exempt until FY 2024. The total income may be under Rs 7 lakh, but you will still need to pay tax on the LTCG portion.[1]
- Speculative and Virtual Digital Asset (VDA) Income: Income from speculative transactions or virtual digital assets like cryptocurrencies is also not eligible for the 87A rebate. Taxpayers earning from such sources will have to pay taxes on this income, even if their total income is below Rs 7 lakh.
- Filing ITR After the Deadline: If you file your Income Tax Return (ITR) after the due date, you may lose out on the 87A rebate benefit. This is because belated ITRs can only be filed under the new tax regime, and if your total income exceeds Rs 7 lakh, no rebate will be applied.
Example: If your gross income is Rs 8 lakh and, after deductions, your taxable income comes down to Rs 4.99 lakh, you can claim the rebate under the old tax regime. But if you miss the filing deadline and file a belated return, the new tax regime will apply, and you will need to show your income below Rs 7 lakh to claim the rebate.[2]
How the 87A Rebate Works?
Under the new tax regime, the rebate is available if your income is up to Rs 7 lakh. The maximum rebate is Rs 25,000, effectively reducing your tax liability to zero if you qualify.
For those filing under the old tax regime, the maximum rebate under Section 87A is Rs 12,500 for individuals with a taxable income of up to Rs 5 lakh.
How to Claim Rebate Under Section 87A?
Follow these steps to claim the 87A rebate:
- Calculate Gross Income: Combine income from all sources like salary, capital gains, house rent, etc.
- Apply Deductions: Subtract eligible deductions (e.g., u/s 80C, 80D, etc.) from your gross income.
- Compute Tax: Calculate your tax liability on the total taxable income (before cess).
- Claim Rebate: If your taxable income is below ₹5,00,000, apply the rebate of up to ₹12,500 to bring your tax liability down to zero.
Short-Term Capital Gains (STCG) and 87A Rebate
Unlike LTCG, short-term capital gains (STCG) on listed shares or equity-oriented mutual funds may qualify for the rebate. Experts suggest that Section 87A does not explicitly deny the rebate on STCG, meaning taxpayers with such income may still be eligible for relief, provided their total income remains below the applicable thresholds.
Beware of the New Tax Regime’s Limited Deductions
It’s important to note that the new tax regime offers very few deductions. Deductions under Chapter VI-A, such as those for insurance premiums, tuition fees, and retirement savings, are only available under the old tax regime. If you file under the new tax regime, you won’t be able to claim these deductions, potentially raising your taxable income above Rs 7 lakh and disqualifying you from the Section 87A rebate.
Filing Your ITR Correctly: Opting Out of the New Tax Regime
The new tax regime became the default from Assessment Year 2024-25. To claim the old tax regime and its rebates, you must opt out of the new regime when filing your ITR. If you don’t choose to opt-out, you will be assessed under the new tax regime by default.
To summarise:
- File on time to choose between the old and new tax regimes.
- Claim deductions under the old regime to reduce your taxable income.
- Be aware of exceptions, like LTCG, speculative income, or digital assets, where the 87A rebate won’t apply.
Conclusion
Section 87A provides significant tax relief to individuals with lower incomes, the application of this rebate have several factors, including income type and filing deadlines. Understanding these exceptions is important to avoid anything surprising when calculating the tax liability.
Always ensure your ITR is filed before the due date, especially if you aim to maximize deductions under the old tax regime and benefit from the 87A rebate. Consulting a tax professional is always a wise step if you’re unsure about which regime to choose or need help navigating the complex tax rules.
Published on September 22, 2024
Drafted by: Shreyashi Chaudhary, 3rd Year B.B.A. LL.B., Symbiosis Law School
[1] https://economictimes.indiatimes.com/wealth/tax/no-income-tax-rebate-u/s-87a-despite-total-income-below-rs-7-lakh-in-these-cases/articleshow/113010670.cms?from=mdr
[2] https://economictimes.indiatimes.com/wealth/tax/no-income-tax-rebate-u/s-87a-despite-total-income-below-rs-7-lakh-in-these-cases/articleshow/113010670.cms?from=mdr