Income Tax Rebate Under Section 87A: Eligibility & Claim Process

Income Tax

The Government of India allows taxpayers with lower annual income to get tax rebate under Section 87A of the Income Tax Act, 1961. Under this Act, your income tax liability becomes nil if your total annual income is up to Rs. 5,00,000. 

Since its introduction by the Finance Act 2003, the law has been amended from time to time to reduce the tax burden of individuals with lower income. Presently, the maximum tax rebate allowed is Rs. 12,500. 

Now, let us check the details of the income tax rebate under Section 87A. 

Who Is Eligible for Rebate under Section 87A?

Individuals have to satisfy the following conditions to be eligible for rebate u/s 87A:

• One’s annual income must not be more than Rs. 5 lakh. Anyone whose income exceeds this limit loses their entitlement to claim the rebate. 
• The maximum limit of this tax rebate is Rs. 12,500. If your total payable tax is less than or equal to this limit, you do not have to pay any tax.
• Rebate under 87A is applicable only for individuals who are resident Indian citizens. Therefore, HUFs (Hindu Undivided Families) and non-resident Indians (NRIs) are not entitled to this rebate.
• Taxpayers of up to 80 years can claim this rebate. Super senior citizens (above 80 years of age) cannot claim this rebate.
• The rebate is calculated on tax liability before health and education cess.
• You can claim this rebate under both the old and new tax regimes.

How to Claim Tax Rebate under Section 87A?

Follow the given steps to calculate the income tax rebate:

Step 1: List down all the incomes in a financial year and categorise them.

Step 2: Calculate your gross annual income for the financial year. This should include income from all sources, including salary, house rent and capital gains from investments etc.

Step 3: Write down all the eligible deductions from your overall income. This includes all available deductions under various sections of Chapter VIA such as these:

• Section 80C- for investment in ELSS, PPF, LIP, EPF etc.
• Section 80CCD- for NPS
• Section 80D- for health insurance premium
• Section 80G- for donations
• Section 80TTA and 80TTB- for interest received from banks

Step 4: Subtract the deductions from your total income. If the result is equal to or less than Rs. 500,000, you can claim a rebate under Section 87A. 

Also read: How To Use Online Income Tax Calculator?

How Can One Claim Tax Rebate under Section 87A

The following example will demonstrate how to claim tax rebate u/s 87A:

Mr Patel has a gross annual income of Rs. 6.75 lakh. He has allocated Rs. 1 lakh to Section 80C investments, Rs. 50,000 in NPS and has paid health insurance premium of Rs. 25,000. 

Given are the steps to calculate his tax rebate:

Step 1: First, add all of his eligible tax deductions. Total deductions = Rs. 1,00,000 + 50,000 + 25,000 = Rs. 1,75,000. 

Step 2: Subtract these deductions from his gross annual income of Rs. 6,75,000. His net taxable income = Rs. 6,75,000 – 1,75,000 = Rs. 5,00,000.

Step 3: Next, we will compute his total tax liability. The calculation is given below: 

5% of Rs. (5,00,000 – 2,50,000) = Rs. 12,500 

Step 4: To find out this tax liability after rebate, subtract Rs. 12,500 from the above amount. Hence, he would have to pay no tax for that year. 

Tax Liabilities for Which This Rebate Can Be Adjusted

Tax rebate of up to Rs. 12,500 available under Section 87A can be claimed against the following tax liabilities: 

• Normal income taxed at applicable slab rate
• Tax on long term capital gains under Section 112 (this section is not applicable for capital gains arising from the sale of listed equity shares and units of equity-oriented mutual fund schemes.) 
• Tax applicable for short-term capital gains earned from the sale of listed equity shares and units of equity-oriented mutual funds under Section 111A. 

You cannot set off your tax liability for long-term capital gains from listed shares and equity funds payable after an initial exemption of Rs. 1,00,000. 

Alternatives Modes of Saving Income Taxes

• You can take a home loan and claim tax deductions for loan repayments. Under Section 80C, you can get deductions of up to Rs. 1.5 lakh for home loan principal repayment. Section 24B of the IT Act allows deductions up to Rs. 2 lakh for home loan interest repayments.
• Tax deductions are available against premiums paid for health insurance policies. Under Section 80D, you can claim Rs. 50,000 for health insurance premium paid for family and self. An additional deduction of Rs. 50,000 is available for paying insurance premiums for parents who are senior citizens.
• Salaried people who are living in a rented property can get tax deduction on rent payments. Section 10(13A) and Section 80GG allows tax deductions for rent paid by individuals.
• Investments like Public Provident Fund (PPF), fixed deposits, National Savings Certificate (NSC), tax saving fixed deposits, ELSS funds etc., allow tax deductions up to Rs. 1.5 lakh under Section 80C.
• You can get tax deduction on the interest paid for an education loan under Section 80E.

Income Tax Rate for Individual Taxpayers

Since FY2020-21, individual taxpayers can choose between two tax regimes- old and new concessional one. The old regime would allow taxpayers to avail existing tax deductions and exemptions available under different sections of the Income Tax Act, 1961. 

The following table lists the tax rates for individuals other than senior and super senior citizens.

The Financial Act 2020 introduced a new tax regime that offered lower tax rates and additional tax slabs. However, one had to forego most of the tax exemptions and deductions available under the old regime. The following are the tax rates under the new regime.

Also read: Income Tax Slab and Rates 2021-2022

Final Word

Any Indian citizen residing in the country can get tax rebate under Section 87A if their net annual income does not exceed Rs. 5 lakh. The amount of rebate is 100% of their income tax payable or Rs. 12,500, whichever is lower and does not include education cess. 

Frequently Asked Questions

1. What is the lowest income tax slab for senior citizens and super senior citizens? 

Senior citizens (60 years or older) with annual income up to Rs. 3,00,000 do not have to pay any income tax. For super senior citizens (80 years or above), the lowest tax slab with no income tax applicable is Rs. 5,00,000. 

 2. What are surcharges for income tax?

If the total income of a taxpayer exceeds Rs. 50 lakh, a surcharge is applicable on the income tax. The following are the rates of surcharges for different annual incomes:

• Rs. 50 lakh to 1 crore- 10%
• Rs. 1 crore to 2 crore- 15%
• Rs. 2 crore to 5 crore- 25%
• Rs. 5 crore to 10 crore- 37%
• Above Rs. 10 crore- 37%

3. Can business owners switch between old and new tax regimes?

Only individuals with no business income can switch between new and old tax regimes every financial year. Individuals with business income have once in a lifetime opportunity to switch back to the old regime after they have opted for the new one.

4. Do you have to pay income tax if your income does not exceed Rs. 5 lakh?

Section 87A allows individuals to claim a tax rebate of up to Rs. 12,500 for individuals with an annual income of up to Rs. 5 lakh. Tax liability at a 5% rate for these individuals can be a maximum of Rs. 12,500, which is covered by the rebate. 

5. Do I need to submit any document for claiming rebate under Section 87A?

No, individuals do not need to submit any document for claiming rebate under Section 87A of the Income Tax Act. One only needs to submit proofs of exemption and deduction that he/she claims for a year.

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.