Rebate under section 87A for FY 2023-24 (AY 2024-25)
For the assessment year 2024-25 (financial year 2023-24), an individual taxpayer who is a resident of India and whose total income does not exceed Rs. 5,00,000 is eligible for a rebate under Section 87A in the old scheme, with a maximum rebate of Rs. 12,500. This means that if the tax liability (after deductions and exemptions) is less than or equal to Rs. 12,500, the rebate will equal the tax liability. In the new scheme, a resident individual taxpayer whose total income does not exceed Rs. 7,00,000 is eligible for a rebate under Section 87A, with a maximum rebate of Rs. 25,000, effectively reducing the tax liability to zero if it is less than or equal to Rs. 25,000.
What are Eligibility Criteria to claim rebate under 87A?
Under the old regime, the rebate under Section 87A is available to resident individuals whose total taxable income does not exceed Rs. 5,00,000. In contrast, under the new regime, the rebate under Section 87A is available to resident individuals whose total taxable income does not exceed Rs. 7,00,000.
What is the maximum limit allowed to claim a rebate under 87A?
The maximum rebate allowed under Section 87A is Rs. 12,500 as per the old scheme, meaning if the total tax liability of an eligible taxpayer is less than Rs. 12,500, the rebate will be equal to the amount of tax liability. Under the new scheme, the maximum rebate allowed is Rs. 25,000, meaning if the total tax liability of an eligible taxpayer is less than Rs. 25,000, the rebate will be equal to the amount of tax liability.
How can we avail ourselves of the Rebate under section 87A?
To calculate the rebate, first compute the total tax payable on the taxable income after allowing for deductions under Chapter VI-A (like Section 80C, 80D, etc.). Under the old scheme, if the tax payable is less than Rs. 12,500 and if the taxpayer meets the income eligibility criteria, the rebate will be equal to the tax payable. Under the new scheme, if the tax payable is less than Rs. 25,000 and if the taxpayer meets the income eligibility criteria, the rebate will be equal to the tax payable.
Now, let's calculate tax liability and the rebate under Section 87A in Old Scheme:
To better understand how Section 87A works, let's consider three different scenarios:
Example 1: Income Below Rs. 5 Lakh
Scenario: Mr. A is a resident individual with a total income of Rs. 4,90,000.
Tax Calculation:
Total Income: Rs. 4,90,000
Taxable Income after deductions: Rs. 4,90,000
Tax Liability Before Rebate:
For income up to Rs. 2.5 lakh: No tax
For income between Rs. 2.5 lakh to Rs. 5 lakhs: 5% of Rs. 2,40,000 = Rs. 12,000
Tax Rebate Under Section 87A:
Eligible rebate: Rs. 12,000 (since it is less than the maximum limit of Rs. 12,500)
Final Tax Liability: Rs. 12,000 - Rs. 12,000 (rebate) = Rs. Nil
Example 2: Income Exactly Rs. 5 Lakh
Scenario: Ms. B is a resident individual with a total income of Rs. 5,00,000.
Tax Calculation:
Total Income: Rs. 5,00,000
Taxable Income after deductions: Rs. 5,00,000
Tax Liability Before Rebate:
For income up to Rs. 2.5 lakh: No tax
For income between Rs. 2.5 lakh to Rs. 5 lakhs: 5% of Rs. 2,50,000 = Rs. 12,500
Tax Rebate Under Section 87A:
Eligible rebate: Rs. 12,500 (the maximum limit)
Final Tax Liability: Rs. 12,500 - Rs. 12,500 (rebate) = Rs. 0
Example 3: Income Above Rs. 5 Lakh
Scenario: Mr. C is a resident individual with a total income of Rs. 6,00,000.
Tax Calculation:
Total Income: Rs. 6,00,000.
Taxable Income after deductions: Rs. 6,00,000
Tax Liability Before Rebate:
For income up to Rs. 2.5 lakh: No tax
For income between Rs. 2.5 lakh to Rs. 5 lakhs: 5% of Rs. 2,50,000 = Rs. 12,500
For income above Rs. 5 lakhs: 10% of Rs. 1,00,000 = Rs. 10,000
Total tax: Rs. 12,500 + Rs. 10,000 = Rs. 22,500
Tax Rebate Under Section 87A:
Eligible rebate: Rs. 0 (since the total income exceeds Rs. 5 lakh)
Final Tax Liability: Rs. 22,500 - Rs. 0 (rebate) = Rs. 22,500
Now, let's calculate tax liability and the rebate under Section 87A in New Scheme:
To better understand how Section 87A works, let's consider three different scenarios:
Example 1: Income Below Rs. 7 Lakh
Scenario: Mr. A is a resident individual with a total income of Rs. 6,50,000.
Tax Calculation:
Total Income: Rs. 6,50,000
Taxable Income after deductions: Rs. 6,50,000
Tax Liability Before Rebate:
For income up to Rs. 3 lakhs: No tax
For income between Rs. 3 lakhs to Rs. 6 lakhs: 5% of Rs. 3,00,000 = Rs. 15,000
For income between Rs. 6 lakhs to Rs. 6.5 lakh: 10% of Rs. 50,000 = Rs. 5,000
Total tax: Rs. 15,000 + Rs. 5,000 = Rs. 20,000
Tax Rebate Under Section 87A:
Eligible rebate: Rs. 20,000 (since it is less than the maximum limit of Rs. 25,000)
Final Tax Liability: Rs. 20,000 - Rs. 20,000 (rebate) = Rs. Nil
Example 2: Income Exactly Rs. 7 Lakh
Scenario: Ms. B is a resident individual with a total income of Rs. 7,00,000.
Tax Calculation:
Total Income: Rs. 7,00,000
Taxable Income after deductions: Rs. 7,00,000
Tax Liability Before Rebate:
For income up to Rs. 3 lakhs: No tax
For income between Rs. 3 lakhs to Rs. 6 lakhs: 5% of Rs. 3,00,000 = Rs. 15,000
For income between Rs. 6 lakhs to Rs. 7 lakhs: 10% of Rs. 1,00,000 = Rs. 10,000
Total tax: Rs. 15,000 + Rs. 10,000 = Rs. 25,000
Tax Rebate Under Section 87A:
Eligible rebate: Rs. 25,000 (the maximum limit)
Final Tax Liability: Rs. 25,000 - Rs. 25,000 (rebate) = Rs. Nil
Example 3: Income Above Rs. 7 Lakh
Scenario: Mr. C is a resident individual with a total income of Rs. 7,10,000.
Tax Calculation:
Total Income: Rs. 8,00,000
Taxable Income after deductions: Rs. 8,00,000
Tax Liability Before Rebate:
For income up to Rs. 3 lakhs: No tax
For income between Rs. 3 lakhs to Rs. 6 lakhs: 5% of Rs. 3,00,000 = Rs. 15,000
For income between Rs. 6 lakhs to Rs. 7 lakhs: 10% of Rs. 1,00,000 = Rs. 10,000
For income above Rs. 7 lakhs: 15% of Rs. 1,00,000 = Rs. 15,000
Total tax: Rs. 15,000 + Rs. 10,000 + Rs. 15,000 = Rs. 40,000
Tax Rebate Under Section 87A:
Eligible rebate: Rs. 0 (since the total income exceeds Rs. 7 lakh)
Final Tax Liability: Rs. 40,000 - Rs. 0 (rebate) = Rs. 40,000
Conclusion
Section 87A rebate is beneficial for taxpayers with lower incomes as it helps reduce their tax burden effectively. It ensures that individuals with income up to a specified limit receive some relief from their tax liability, thereby promoting equitable taxation. This rebate encourages compliance and provides relief to those who are in the lower income brackets, making the taxation system more progressive.