Eligibility For The Income Tax Rebate Under Section 87A, How to Claim It, and More

Q: 2. What happens if my taxable income exceeds ₹5,00,000?

If your taxable income exceeds ₹5,00,000, you are not eligible for the rebate under Section 87A, even if your tax liability is below ₹12,500.

Indiafirst Life
• 31 Jan, 2025

The Income Tax Rebate under Section 87A is a significant provision in the Indian Income Tax Act. It was introduced to provide financial relief to individual taxpayers in the lower-income bracket. This rebate offers direct tax savings, making it one of the simplest and most effective ways to reduce your tax burden.

Over the years, Section 87A has undergone revisions to ensure its relevance to the ever-changing economic landscape. This has made it a significant tool for tax planning. Let’s explore what the rebate involves, who qualifies for it, how it’s calculated, and how you can claim it.

What is Section 87A?

It is a rebate provision under the Income Tax Act of 1961. Section 87A allows for a deduction of up to ₹12,500 from the total tax payable. This deduction limit is applicable only under the old regime.

If the calculations are carried out according to the new regime, a tax rebate of an amount of income tax payable for his income or an amount of up to ₹25,000, whichever is lower, can be availed. In this case, the resident individual taxpayer can have a taxable income of up to ₹7 lakhs.

If the income under the new tax regime is lower than ₹5 lakhs, then the taxpayer can avail of a rebate for an amount equivalent to their applicable taxes, or ₹12,500, whichever is lower.

Key Features of Section 87A

1. Direct Reduction in Tax Liability: Section 87A provides a direct rebate on the tax payable, ensuring quick and efficient tax savings.

2. Tax-Exempt Status for Low-Income Earners: For those with taxable incomes below ₹5,00,000 to ₹7,00,000, this rebate effectively eliminates the tax liability.

3. Simplicity and Accessibility: Unlike other tax-saving provisions, there are no complex investment requirements or documentation needed to avail of this rebate.

4. Encourages Compliance: By reducing the financial burden of taxation, Section 87A promotes better compliance among taxpayers.

Benefits of Section 87A for Taxpayers

The rebate under Section 87A provides several benefits to taxpayers, especially those in the lower-income bracket. Primarily, it significantly reduces the tax burden. It ensures individuals with taxable incomes up to ₹5,00,000 or ₹7,00,000 can save up to ₹12,500 or to ₹25,000 respectively, on an annual basis. This relief encourages better compliance, as taxpayers are motivated to file their returns promptly. Additionally, the rebate can simplify tax planning for those unable to invest heavily in tax-saving instruments. By offering direct savings, it increases disposable income, enabling individuals to allocate funds for essential needs, savings, or investments. This provision aligns with the government's goal of financial inclusivity.

Eligibility Criteria for Section 87A

Not all taxpayers can avail of this rebate, as it is targeted toward resident individuals with lower incomes. Here are the key eligibility criteria:

1. Resident Individual Status: The rebate is applicable only to resident individuals in India. Non-resident Indians (NRIs), Hindu Undivided Families (HUFs), and corporations, are not eligible.

2. Taxable Income Threshold: After accounting for all eligible deductions under various sections, your total taxable income must not exceed ₹5,00,000 or ₹7,00,000.

Even senior citizens (between the ages of 60 and 80) can claim this rebate if they meet the income threshold.

How is the Section 87A Rebate Calculated?

The rebate under Section 87A is straightforward to calculate but involves a few important steps. Let’s break it down:

1. Determine Gross Income: Calculate your total income from all sources, including salary, rental income, capital gains, and other earnings.

2. Apply Deductions: Deduct eligible amounts under sections (such as 80C, which concerns itself with investments in PPF, ELSS, and others), 80D (health insurance premiums), and other tax-saving sections.

3. Calculate Taxable Income: Subtract the deductions from your gross income to arrive at your taxable income.

4. Apply Tax Slabs: Compute your total tax liability using the applicable tax rates.

5. Rebate Application: If your taxable income is ₹5,00,000 or less, apply the rebate of up to ₹12,500 to reduce your tax liability.

You may follow the same process for carrying out calculations according to the new regime and its respective limits and conditions.

Example of Tax Rebate Calculation

To illustrate how Section 87A works, let’s consider the following example:

Gross Income: ₹6,65,000
Deductions (80C & 80D): ₹1,70,000
Taxable Income: ₹4,95,000

Tax Calculation:

Tax on first ₹2,50,000: 0% = ₹0
Tax on next ₹2,45,000: 5% = ₹12,250
Less: Rebate under Section 87A = ₹12,250

Final Tax Payable: ₹0

This example highlights how the rebate under Section 87A can completely eliminate the tax liability for individuals in the specified income bracket.

How to Claim Rebate Under Section 87A

Claiming the rebate is a simple process that involves accurate tax-filing and proper documentation.

Here’s what you need to do:

1. File Your ITR on Time: Ensure that your Income Tax Return (ITR) is filed within the stipulated deadline.

2. Include All Income Sources: Accurately report income from all sources, including salary, business profits, and investments.

3. Deduction Details: Provide details of all deductions claimed under sections such as 80C and 80D.

4. Automated Calculation: Most online tax-filing portals and software automatically apply the rebate under Section 87A if you meet the criteria.

Changes in Section 87A Over the Years

The rebate amount and income threshold under Section 87A have evolved since its introduction in 2013:

2013: Rebate of ₹2,000 for incomes up to ₹5,00,000.
2016: Increased to ₹5,000.
2019: Raised to ₹12,500, applicable for taxable incomes of up to ₹5,00,000.
2023: Rebate of up to ₹25,000 for incomes up to ₹7,00,000 and up to ₹12,500 for incomes up to ₹7,00,000 (in the new regime).

These changes reflect the government’s effort to support lower-income groups by offering substantial tax relief.

Importance of Section 87A in Tax Planning

Section 87A plays a pivotal role in tax planning for individuals in the lower-income bracket. By offering direct tax relief, it ensures taxpayers have more disposable income, enabling them to save or invest for their future financial goals.

The provision simplifies tax compliance, as individuals earning below the threshold need not make significant adjustments to their tax plans.

Tips to Maximise Your Tax Savings

With proper planning and awareness, taxpayers can maximise their benefits and enjoy peace of mind via reduced tax obligations.

1. Invest Strategically: Utilise deductions under sections such as 80C (PPF, NSC, ELSS) to reduce taxable income and qualify for the rebate.

2. Plan Health Insurance Wisely: Health insurance premiums under Section 80D not only provide coverage but also help reduce taxable income.

3. Stay Updated: Stay informed about any changes to tax laws, rebate limits, or thresholds to maximise your benefits.

The Income Tax Rebate under Section 87A is a crucial tool for middle-income and lower-income taxpayers. By providing a direct reduction in tax liability, it ensures that individuals with taxable incomes of up to ₹7,00,000 effectively pay no taxes.

Understanding and utilising this rebate can lead to significant tax savings, encouraging financial stability and better compliance.

Frequently Asked Questions

1. Is Section 87A applicable to HUFs or firms?

No, the rebate under Section 87A is available only to resident individuals.

2. What happens if my taxable income exceeds ₹5,00,000?

If your taxable income exceeds ₹5,00,000, but is under ₹7,00,000, you may be eligible for rebates under Section 87A, depending on the regime chosen and the applicable limits.

3. Can senior citizens claim the rebate?

Yes, depending on the age range they fall in, senior citizens can claim the rebate if their taxable income does not exceed ₹5,00,000.

4. Is the rebate applied automatically?

Yes, most tax-based computation systems apply the rebate automatically if the eligibility criteria are met.

by IndiaFirst Life
Headquartered in Mumbai, IndiaFirst Life Insurance Company Limited (IndiaFirst Life), with a paid-up share capital of INR 754.37 crore, is one of the fastest growing private life insurers in India in terms of New Business IRP in Fiscal 2023. Our key differentiators are our simple, easy-to-understand products that are optimally priced. As of Sept 30, 2023, we offered 30 retail products, 13 group products along with six riders (across retail and group portfolios), along with policies under the PMJJBY scheme, catering to protection, savings, health and retirement needs of our customers, leveraging multiple distribution capabilities and augmenting various investment options. In all propositions under the categories of Participating Plans, Non-Participating Savings Plans, Non-Participating Protection Plans, Unit Linked Insurance Plans, Group Protection Plans, Corporate Funds Plans, Riders & PMJJBY form a complete suite of offerings that help our customers prepare for the certainties of life. Our products are easy to understand and optimally priced with a developed comprehensive risk management framework/policy.