Income Tax Rebate: Section 87A, Meaning, Types and Eligibility

Every income-earning individual or business in India is required to pay income tax. The Income Tax Act of India regulates taxpayers. This tax is paid to the central government and is used for the development of the nation. Every year, during the Union Budget, the government releases the latest regulations based on which taxpayers can calculate their income tax. These updates are based on the current situation of the economy. They provide some attractive benefits to taxpayers that can help them lower the tax burden, especially for those taxpayers that fall in the lower income tax brackets. An Income Tax Rebate is one such benefit.

Section 87A of the Income Tax offers a rebate to specific taxpayers that can help them lower their income tax liability . A rebate is offered when the taxpayer’s total taxable income falls above the basic exemption limit. The government offers a reduction in tax if the taxpayers meet specific conditions.The rebate, as per Section 87A, is offered based on the total taxable income of the eligible taxpayers.

The following taxpayers are eligible for the rebate under section 87A:

1. Individual taxpayers
2. Resident of India
3. Below 80 years of age
4. Total taxable income (after availing deductions of Chapter VI) is Rs. 5 lakhs or less.

The regulations of Income Tax Rebate under Section 87A apply to taxpayers who have opted for the new income tax regime as well. However, the amount of rebate under the new income tax regime will be slightly different in the upcoming financial year 2023-24.

The Union Budget may contain detailed updates on how much rebate is allowed in a particular financial year. As per the Union Budget of 2023, the rebate allowed under Section 87A is different for the old and new income tax regimes.

The tax slabs for an individual under 60 years of age as per the old income tax regime are as follows:

If the total taxable income of the taxpayer is Rs. 5,00,000 or less, they are eligible for the rebate under section 87A. This means that even though they fall in the first taxable slab of 5% income tax, they will receive a rebate which will reduce their income tax liability .The income tax liability for the purpose of assessing the rebate is computed after making all the available deductions under Chapter VI-A which include deductions under Section 80C, Section 80D and other common deductions available to taxpayers. The final taxable income has to be Rs. 5,00,000 or less.Now, typically, the maximum tax liability for a taxpayer earning Rs. 5,00,000 is Rs. 12,500 (5% of Rs. 5,00,000 as per slab rates). Therefore, this entire tax amount will be offered as a rebate. The maximum income tax rebate will be lower of Rs. 12,500 or the actual income tax payable. Also Read : Income Tax Returns: All you Need to Know Before Filing ITR For example, A taxpayer has a salary income of Rs. 6,00,000 after deducting the standard deduction available of Rs. 50,000. The taxpayer has made investments in fixed deposits as well as EPF and claims deductions of Rs. 1.5 lakh under Section 80C. Therefore, the total taxable income of the taxpayer is Rs. 4,50,000. As per the slab rates, the income tax payable will be Rs. 10,000 (Rs. 4,50,000 - Rs. 2,50,000 = Rs. 2,00,000 * 5%). Since the taxpayer meets all the eligibility criteria, this amount of Rs. 10,000 will be the rebate under Section 87A that the taxpayer can avail, and the net tax payable will be nil.

The tax slabs under the new income tax regime are as follows:

If the total taxable income of the taxpayer is Rs. 7,00,000 or less, they are eligible for the rebate under section 87A. This means that even though they fall in the first taxable slab of 5% income tax or part of the second taxable slab of 10%, they will receive a rebate which will reduce their income tax liability.Now, typically, the maximum tax liability for a taxpayer under the new income tax regime earning Rs. 7,00,000 is Rs. 25,000 calculated as follows - 5% of Rs. 3,00,000 (Rs. 6,00,000 minus Rs. 3,00,000) plus 10% on Rs. 1,00,000 (Rs. 7,00,000 minus Rs. 6,00,000). Therefore, this entire tax amount will be offered as a rebate. The maximum income tax rebate will be lower of Rs. 25,000 or the actual income tax payable. For example, A taxpayer has a salary income of Rs. 6,50,000 after deducting the standard deduction available of Rs. 50,000. The total taxable income of the taxpayer is Rs. 6,50,000. As per the slab rates, the income tax payable will be Rs. 20,000, calculated as follows - 5% of Rs. 3,00,000 (Rs. 6,00,000 minus Rs. 3,00,000) plus 10% on Rs. 50,000 (Rs. 6,50,000 minus Rs. 6,00,000).Since the taxpayer meets all the eligibility criteria, this amount of Rs. 20,000 will be the rebate under Section 87A that the taxpayer can avail, and the net tax payable will be nil.

A taxpayer can follow the following steps to claim the rebate under Section 87A:

1. Calculate the gross total income for a financial year.
2. Calculate all the tax-saving investments made as per the rules of Chapter VI-A. For example, only Rs. 1,50,000 is allowed as deductions under Section 80C .
3. Find out the total taxable income by reducing the amount in point 1 above with the amount calculated in point 2 above.
4. If the taxpayer meets all the eligibility criteria, they have to declare the income and investments in their annual returns to claim the rebate. The rebate is automatically calculated on the online portal at the time of filing income tax returns.
5. File the returns before the due date and enjoy the benefits of the rebate by earning above the income tax slab rate and still paying no income tax.

1. For taxpayers to claim an income tax rebate under Section 87A, the taxpayer does not have to calculate the health and education CESS. Since the rebate makes the tax payable as nil, there will be no CESS applicable.
2. Super senior citizens, which refers to citizens above the age of 80, are not eligible for income tax rebate under Section 87A.
3. The option of availing income tax rebate is also available in case the taxpayer files belated returns (filing returns after the due date to file annual returns).
4. The income tax rebate cannot be adjusted income from long-term capital gains on equity shares and equity-oriented mutual funds (Section 112A).

For example, if a taxpayer under the old income tax regime has a salary income of Rs. 4,50,000, long-term capital gains from shares of a company of Rs. 2,00,000 and deductions under Chapter VI-A of Rs. 1,50,000, the taxable income as per slab rates will be Rs. 3,00,000 (Rs. 4,50,000 minus Rs. 1,50,000). As per Section 112A, the long-term capital gains on the equity shares will be taxed at 10% above an income of Rs. 1,00,000 (Rs. 1 lakh is the threshold). Therefore the rebate will be available for the income of Rs. 2,500 calculated as follows - 5% on Rs. 50,000 (Rs. 3,00,000 minus Rs. 2,50,000 as per slab rates).However, the taxpayer will have to pay an income tax of Rs. 10,000 calculated as follows - 10% on Rs. 1,00,000 (Rs. 2,00,000 minus Rs. 1,00,000 as per section 112A). Health and education CESS would also be added to the income tax payable amount to arrive at the final income tax liability. Also Read: New Income Tax Slabs and Rates FY 2023-24

Under the old and new tax regime, the amount of income tax rebate allowed under Section 87A for the financial year 2022-23 and 2021-22 is the same. If the total taxable income of the taxpayer is lower than Rs. 5,00,000, then the taxpayer is eligible for getting the income tax rebate (considering all other eligibility criteria are met). This taxable income is computed after deducting the investments and expenses under Chapter VI-A if the taxpayer availed the old tax regime. Therefore, the maximum income tax rebate that taxpayers can get for FY 2022-23 or FY 2021-22 is Rs. 12,500. Other conditions like being less than 80 years of age, not having income from long-term capital gains by selling equity shares or equity-oriented mutual funds, being a resident of the country, etc., remain unchanged in these financial years as well.

During the financial year 2020-21 and 2019-20, the same rules continue to apply as in the financial years 2022-23 and 2021-22. The maximum rebate was limited to Rs. 12,500 or actual income tax payable before CESS, whichever was lower. The eligibility criteria also remained unchanged.Here is an example of how to compute the income tax rebate for a taxpayer who is above 60 years of age but below 80 years of age (senior citizen but not a super senior citizen).The taxpayer is 70 years old and has an income of Rs. 3,50,000 from house property and an income of Rs. 1,50,000 from long-term capital gains from the sale of equity-oriented mutual funds. Now the slab rates for an individual taxpayer who is a senior citizen are slightly different from an individual taxpayer who is less than 60 years of age.The tax slabs for an individual over 60 years of age but under 80 years of age are as follows:

Therefore, the computation for income tax rebate will be as follows:An income tax rebate on the income of Rs. 3,50,000 can be availed.Income tax payable = Rs. 2,500 calculated as follows - 5% on Rs. 50,000, which is Rs. 3,50,000 minus Rs. 3,00,000 (basic exemption limit).The income tax rebate will only be allowed for this income, and the maximum income tax rebate will be lower of Rs. 12,500 or actual income tax payable, which is Rs. 2,500 in this case.However, the income of Rs. 1,50,000 from long-term capital gains from the sale of equity-oriented mutual funds is not eligible for an income tax rebate. Therefore, the tax computed will be as per Section 112A, which allows an exemption of Rs. 1,00,000. Therefore, as per Section 112A, the tax payable will be Rs. 5,000, which is calculated as follows - 10% of Rs. 50,000 (Rs. 1,50,000 minus Rs. 1,00.000).Therefore, the taxpayer will have to pay Rs. 5,000 plus health and education CESS as tax.

The income tax rebate in financial years 2018-19 and 2017-18 was much lower. The amount of income tax rebate that a taxpayer could claim was capped at Rs. 2,500. Therefore, only if the income tax payable on the income earned in these financial years did not cross Rs. 2,500 an income tax rebate was offered, and the taxpayer would have to pay nil tax. This means that if the total taxable income of the taxpayer was Rs. 3,00,000 or less, only then they would get an income tax rebate.For the financial year 2016-17, an income tax rebate of Rs. 5,000 was allowed, and for earlier financial years, an income tax rebate of Rs. 2,000 was allowed.Ready to make the most of your money? Start your tax planning journey now!