Tax Relief Under Section 87A Of Income Tax Act: How To Claim Tax Rebate Under Section 87A

Income Tax

Taxpayers can reduce their tax liability through the rebate under Section 87A of the Income Tax Act. Individuals can claim the rebate if the total income (after Chapter VIA reductions) is up to Rs. 5 lakh in a financial year. 

What is the eligibility criteria for claiming a tax rebate under Section 87A and how to claim it? Keep reading to get the details here.

What is Section 87A?

Section 87A of the Income Tax Act helps individuals reduce their net income tax liability if their income is less than or equal to Rs 5 lakhs per annum. It was introduced under the Finance Act in 2003 and at the time, the maximum tax rebate amount under Section 87A was Rs. 2000. Since then the maximum amount has been raised. After Union Budget, 2019, the net taxable income was increased to Rs. 5 lakh and the maximum limit of Section 87A was increased to Rs. 12,500. In other words, individuals with an income lower than Rs. 5 lakh per year are totally exempted from income tax. 

Eligibility Criteria for Claiming Tax Rebate Under Section 87A

Tax rebate under Section 87A is available for both old and new tax regimes for Financial Year 2021-2022 (The assessment Year 2022-2023). The limit remains the same, i.e. Rs. 12,500 

• Individuals with net taxable income up to Rs. 5 lakh. Say, you earn Rs. 6 lakh per year and you claim a tax deduction of Rs. 1.5 lakh under Section 80C (only for the old regime), then your net taxable income becomes (Rs 6 lakh – Rs. 1.5 lakh) Rs. 4.5 lakh. Therefore, you will be eligible for claiming a rebate under 87A. 
• Senior citizens (between 60 and 80 years of age) can claim this rebate.
• Super senior citizens (80+years) are not eligible u/s 87A.
• Section 87A of the income tax act is applicable to both old and new tax regimes.

But how to claim a tax rebate under 87A? The following step-by-step instructions can help.

How to Claim Tax Rebate Under Section 87A

Step 1: Calculate the gross income for the fiscal year. This includes income from all sources such as salary, business, investments, etc. 

Step 2: Next, deduct the tax amount under Section 80C, 80U and 24(b) (if you have home loan interest payment) if you have opted for the old tax regime. The amount you get is the net taxable income. 

Step 3: If the net taxable income comes lower than Rs. 5 lakhs, you can claim a maximum tax rebate of Rs. 12,500.  

Let us take a look at the tax rebate amounts for various taxable incomes lower than Rs. 5 lakhs.

Also Read – Income Tax Slabs And Rates

Rebate Limit Under Section 87A 

 Illustration of Tax Rebate Under Section 87A

The following example highlights the rebate calculation for people aged below sixty years in AY 2022-2023:

A person can claim deductions under some of the following Sections:

• 80C for particular expenditures and investments
• 80D for health insurance
• 80CCD for contributing to National Pension  Scheme
• 80G for donations

Points to Remember for Section 87A of Income Tax Act  

If you want to avail relief under section 87A, go through the facts below:

• Only Indian residents are eligible for this option.
• An individual can apply the rebate to the tax prior to adding an education and health cess of 4%.
• The rebate amount will be lesser than the prescribed limit u/s 87A or the income tax (prior to cess).
• Senior citizens aged above 60 but below 80 years can get this rebate.  

Rebate Against Different Taxes  

This section of the Income Tax  Act offers rebates against taxes on:

• Regular earnings which are taxable at the income slab tax rate
• Short-term capital gains on equity-based mutual fund schemes and equity shares u/s 111A, on which the tax rate is 15%
• Long-term capital gains as per Section 112 of income tax (This Section is applicable for long-term gains on selling capital assets except for equity-based mutual fund schemes and listed equity shares)

Also Read – Income Tax Rebate: Eligibility And Types Of Tax Rebates In India

Calculations for Section 87A Rebate

Given below are some calculations of the relief under section 87A available for Indian residents (aged below 60 years) earning different levels of income:

Calculation of Tax Liability

Shyam (a resident aged 61 years) receives a pension amounting to Rs. 4,000 per month. In addition, he invested in equity-based funds in November 2012 but sold the units in May 2020.

His taxable long-term capital gain is Rs. 4,60,000. He has no other income other than gains on equity-based funds and pension. What is the tax payable for 2020-21?

Shyam’s exemption limit will be Rs. 3,00,000. He will adjust this exemption limit against long-term capital gains on equity-related funds. However, the adjustment against regular income is made before the consideration of the LTCG. In this situation, he has an LTCG of Rs. 4,60,000 and a pension of Rs. 48,000 (Rs. 4000 x 12).

Hence, on adjusting the exemption slab with pension, he needs to adjust Rs. 2,52,000 (Rs. 3,00,000 – Rs. 48,000) against LTCG. Now, the remaining LTCG amounts to Rs. 2,08,000 (Rs. 4,60,000 – Rs. 2,52,000). The tax rate on LTCG of equity-based funds is 10% if the gain exceeds Rs. 1,00,000. 

For Shyam, a tax of 10% is charged on Rs. 1,08,000 (Rs. 2,08,000 – Rs. 1,00,000). So, the tax payable is Rs. 10,800. The rebate will not get adjusted against the LTCG tax of equity-related funds (as per Section 112A). Shyam will be paying an education and health cess of 4% plus Rs. 10,800.       

Final Word

The rebate applicable under Section 87A of the Income Tax Act is a useful tool for saving taxes during a fiscal year. However, there are other means of getting tax benefits, such as ELSS mutual funds. 

Navi Long Term Advantage Fund is an Equity Linked Saving Scheme that enables an investor to save taxes. This scheme offers a deduction of Rs. 46,800 (maximum) u/s 80C. A person can start investing in this fund through entities such as Groww, Kuvera, Zerodha and Paytm Money.  

FAQs on Section 87A

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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.