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Section 87A of the Income Tax Act,1961 was introduced in the financial year 2013-14 for the benefit of individuals whose taxable income does not exceed Rs. 5,00,000. The government provides this tax benefit to individuals only. Section 87A deals with rebates provided to taxpayers on the total tax payable by them. Section 87A was introduced to encourage individual taxpayers to pay tax on an annual basis and encourage self-assessment of tax and payment of the same.As we saw above the section helps to reduce the tax liability of an individual after all the deductions are made. Therefore you can claim a rebate if after deductions under Chapter VI A your taxable income does not exceed Rs. 5 lakhs. For availing rebate under this section, you need to calculate tax after deductions. HUFs, firms or companies cannot claim this rebate. The income tax rebate will be automatically claimed while filing the income tax return. No benefit of the income tax rebate is available to Non-Resident Indians. The rebate allowed under this section for the financial year 2021-22 is Rs. 12,500 or the tax payable whichever is lower.
Eligibility Criteria to Avail Rebate Under Section 87A
An individual can claim an income tax rebate under Section 87A if -
- One is a resident individual
- The total income minus deductions must be less than or equal to Rs. 5,00,000.
- The income tax rebate can be up to Rs. 12,500. If any individual is paying tax below the above amount, a rebate will be provided for that amount. The rebate is applied before calculating the education cess of 4%.
Calculation of Rebate Under Section 87A
Let us understand with the help of an example on how to calculate the rebate under section 87A
Example 1: Mrs Sandhya has an annual income of Rs. 7.25 lakhs. She invested Rs. 1.5 lakhs in investments covered under section 80C. She invests Rs. 50,00 in NPS and Rs. 25,000 in a medical insurance policy. Calculate the rebate.
| Gross total income | Rs. 7.25 lakhs |
| (-) Deduction under section 80C | Rs. 1.5 lakhs |
| (-) Deduction for NPS | Rs. 50,000 |
| (-) Deduction of medical insurance | Rs. 25,000 |
| Net income | Rs. 5,00,000 |
| Tax @5% on 5,00,000 | Rs. 12,500 |
| (-) Rebate on 5,00,000 | Rs. 12,500 |
| Tax liability | Nil |
Example 2: Mrs. Shweta has an annual income of Rs. 6.25 lakhs and claims deduction under section 80C and pays medical insurance of RS. 25,000. Calculate the rebate.
| Gross total income | Rs. 6.25 lakhs |
| (-) Deduction under section 80C | Rs. 1.5 lakhs |
| (-) Deduction for medical premium | Rs. 25,000 |
| Net income | Rs. 4.75 lakhs |
| Tax @5% on 4,75,000 | Rs. 11,250 |
| (-)Rebate available | Rs. 11,250 |
| Tax liability | Nil |
As you can see in the first example, the rebate available is Rs. 12,500 and in the second example, the rebate available is Rs. 11,250. The difference is that the taxpayer should not get an undue benefit from claiming a rebate. This step is taken by the government to not overlook the actual liability and limit the rebate to the tax payable.
The limit for rebates has been changed by the government for various financial years.
| FY 2013-14 | 2000 |
| FY 2014-15 | 2000 |
| FY 2015-16 | 2000 |
| FY 2016-17 | 5000 |
| FY 2017-18 | 2500 |
| FY 2018-19 | 2500 |
| FY 2019-20 | 12,500 |
| FY 2020-21 | 2500 |
| FY 2021-22 | 12,500 |
Alternative Means to Claim a Rebate
To claim a rebate you can invest in other options under the Income Tax Act,1961. Some of the options are
- The premiums paid for life insurance policies are eligible for deduction under section 80C
- You can buy a house and the principal and interest payments are also eligible for deduction under section 80C
- The premiums paid for dependent parents are also eligible for deduction under section 80D
- Investing in the National Pension Scheme (NPS) can also reduce the taxable income by Rs. 50,000.
How Can You Claim Rebate under Section 87A?
1. Collate all the incomes that you have earned in a year and categorize them into their respective heads.
2. Aggregate the total income that you have earned
3. This step will be your gross total income
4. Deduct any exemptions available and all the deductions available to the taxpayer on the gross total income.
5. Then calculate your net taxable income
6. Calculate your liability in case of income above Rs. 2.5 lakhs
7. Calculate the rebate if your net taxable income is below Rs. 5 lakhs.
8. The rebate available will be Rs. 12,500 or the tax payable whichever is lower.
Actual Working of Rebate
A lot of taxpayers think that if their income does not exceed Rs. 5,00,000, they wouldn’t be liable to pay tax as the tax on the difference between the two tax slabs is Rs. 12,500 which is the rebate available to the taxpayer. But, if the taxpayer’s income includes income from short term capital gains which are taxed at 15% or long term capital gains which are taxed at 20%, then even if their income is lower than Rs. 5,00,000 they will pay some amount of tax.
Let us understand with the help of an example
If your income is Rs. 5,00,000 and you have an income of Rs. 1 lakh on one lakh equity shares listed on the stock exchange your tax liability would be Rs. 22,500 and even after a rebate of Rs. 12,500, the tax payable would be Rs. 10,000.
Rebate On Educational Expenses
If a taxpayer has expended any sum on their child who is less than 21 years of age and is studying outside India, and the child is dependent on him then a deduction is available to the parent is Rs.2,500 or 25% of his total income whichever is less in case of one child
In case of more than one child it is Rs. 4,500 or 25% of his total income whichever is less.
Things To Remember
1. Only resident Indian taxpayers can claim a rebate
2. The rebate will be calculated before heath and education cess
3. Taxpayers below 60 years and between 60-80 years can claim this rebate
4. Super senior citizens cannot claim this rebate
5. Rebates can be claimed under the old and new regimes of taxation
6. Calculate the tax payable and then assess the rebate amount if the tax payable is less than Rs.12,500, then the rebate claimed can be equal to that amount.
7. Your income should be less than Rs. 5 lakhs.
8. If the rebate is to be claimed, the deductions and exemptions should be subtracted before calculating net taxable income.
FAQS
1. What is Section 87A?
This section under the Income Tax Act,1961 deals with obtaining a rebate on the net taxable income to be paid by the taxpayer.
2. What is the income tax rebate for FY 2021-22?
The income tax rebate for the year is Rs. 12,500
3. What is the eligibility to claim a rebate under section 87A?
The taxpayer should be
- A resident Indian
- And should have an income less than Rs. 5lakhs
- If the tax payable is less than Rs. 12,500, the rebate provided will be the amount of tax payable
4. Can an NRI claim a rebate under section 87A?
No, an NRI cannot claim a rebate under section 87A
5. Is a rebate available on casual incomes such as winning a lottery?
No, the rebate is calculated on net taxable income and thus it has nothing to do with casual incomes earned.