Resident individual taxpayers under the existing tax regime (with a total income of up to Rs 500,000) can receive a tax rebate of up to Rs 12,500. However, resident individual taxpayers opting for the new tax regime under Section 115BAC (with a total income up to Rs 700,000) can claim a higher tax rebate of up to Rs 25,000 under Section 87A, effective from AY 2024-25.
Tax Rebate u/s 87A for AY 2024-25 (Existing Regime)
Section 87A of the Income Tax Act, 1961, provides a 100% tax rebate if the income tax liability is up to Rs 12,500 for resident individuals with taxable income up to Rs 500,000 under the existing tax regime. Notably, no marginal relief is available if total income exceeds Rs 500,000, unlike the tax rebate under the new tax regime from AY 2024-25.
The tax rebate under Section 87A was increased under Section 8 of the Finance Act, 2019, from Rs 2,500 to Rs 12,500, applicable from AY 2020-21 onwards. Introduced by the Finance Act 2017, Section 87A initially offered tax relief of up to Rs 2,500 to resident individuals with taxable income up to Rs 3.5 lakhs.
Therefore, resident individuals with a total income up to Rs 5,00,000 can claim a full tax rebate of up to Rs 12,500 under Section 87A, deducted from their tax liability. This means the rebate under Section 87A is either 100% of the income tax liability or Rs 12,500, whichever is less, for resident individuals with a total income up to Rs 5,00,000. However, this rebate is not applicable if the taxable income exceeds Rs 500,000.
The enhanced tax rebate allows individuals under the existing regime, who invest up to Rs 150,000 and are eligible for deductions under Section 80C, to have a tax-free income of up to Rs 650,000. This amount can be further increased by utilizing other deductions and exemptions, such as interest on home loans (up to Rs 200,000), interest on education loans, NPS contributions, medical insurance premiums, and medical expenses for senior citizens.
Tax Rebate u/s 87A for AY 2024-25 (New Regime)
Section 44 of the Finance Act, 2023, introduced a higher tax rebate of up to Rs 25,000 for resident individuals with a total income of up to Rs 700,000 who opt for the new tax regime under Section 115BAC of the Income Tax Act, 1961, from AY 2024-25 onwards. Furthermore, these taxpayers can avail of marginal relief for incomes slightly exceeding Rs 700,000 to ensure they don’t lose out on this tax rebate.
Marginal Relief for Tax Rebate u/s 87A
If the marginal difference in tax liability (i.e., tax on actual income minus tax on Rs 700,000 income) is greater than the marginal difference in income (i.e., actual total income minus Rs 700,000 income), then the marginal rebate under Section 87A to the extent of such excess is available from AY 2024-25 to ensure the availability of a tax rebate of up to Rs 25,000. This calculation procedure is similar to that of marginal relief from surcharge.
Illustration:
The tax rebate of Rs 25,000 is available to anyone earning up to Rs 7 lakh under new regime. Suppose you earned Rs 7.1 lakh. Instead of losing the entire rebate for earning slightly more than Rs 7 lakh, this new provision of marginal relief in new tax regime helps you. It works like this:
i) Calculate the extra tax liability on the extra Rs 10,000 you earned beyond Rs 7 lakh.
ii) Suppose your extra tax liability works out to Rs 20,000, then your rebate will be Rs 10,000 (i.e. Rs 20,000 extra tax minus Rs 10,000 extra income). You will get partial rebate in case your income slightly exceeds the threshold of Rs 7 lakh which as a consequence increases tax liability substantially.
Essentially, this rule prevents a sudden jump in your taxes by offering marginal relief for tax rebate when you barely cross the Rs 7 lakh threshold.
Taxes Not Subject to Rebate u/s 87A
Certain taxes are not eligible for the rebate under Section 87A, such as the tax on the accumulated balance of a recognized provident fund (Section 111) and the tax on long-term capital gains from the transfer of certain securities (Section 112A of the Income Tax Act, 1961).
Long-term capital gains (LTCG) from equity shares, equity mutual funds, and certain other specified incomes do not qualify for the tax rebate under Section 87A. While LTCG up to Rs 1 lakh is exempt from tax, any amount exceeding this limit is taxable at a special rate of 10%.
For instance, if an individual’s taxable income qualifies for the rebate under Section 87A, but they also have LTCG from equity shares or equity mutual funds, they must pay a special rate of 10% tax on the LTCG amount, irrespective of the rebate. Consider an individual with a net taxable salary of Rs 3.3 lakh per year and LTCG of Rs 1.30 lakh. They would pay 10% tax on the LTCG (Rs 30,000), plus cess at 4%, totaling INR 3,120. However, the tax payable on their net taxable salary would still be eligible for the rebate under Section 87A, thus reducing their overall tax liability.
In addition, certain special incomes, such as winnings from gambling, virtual digital assets (VDAs), online gaming, lotteries, game shows, or betting, do not qualify for the tax rebate under Section 87A. These incomes are taxed at a flat rate of 30%, along with cess and surcharge, if applicable.
Related Posts: >> Finance Act, 2022 >> Finance Act, 2023 >>
When total income is above Rs 7 lakh, how the rebate u/s 87A is calculated?
Please refer the para ‘Marginal Relief for Tax Rebate u/s 87A’.