While that extra income may have sparked your eye, it also brought a twinkle to the tax collector, ie, the ITD.
But what if you’ve just started earning, and your annual income just exceeds the basic exemption limit (₹2,50,000) by just ₹20,000? This means you will have to pay a tax of ₹1,000 (20,000*5%) on the extra 20,000 earned.
Here, the government comes in as the fairy. It says you need not pay any tax since your income is a little extra than the exemption limit. This is because it offers a rebate u/s 87A.
So, what is the rebate u/s 87A?
Rebate u/s 87A helps taxpayers reduce their income tax liability. It is available under the old as well as the new regime. You can claim the rebate up to a maximum of ₹12,500 if your total income, i.e. after Chapter VIA deductions, does not exceed ₹5,00,000 (till FY 2022-23) in a financial year. So, your income tax liability becomes nil after claiming the rebate under Section 87A.
Rebate u/s 87A has been extended for income ₹7,00,000 under the new regime FY 2023-24 onwards.
How do you claim the rebate u/s 87A?
- Arrive at your Gross Total Income for the FY
- Reduce it with the deductions applicable
- This gives your Net Total Income
- Claim this rebate if the net total income does not exceed ₹5,00,000
Points to Remember:
- Only resident individuals up to 80 years of age are eligible to avail of rebate under this section.
- The amount of rebate will be lower than the limit specified under Section 87A or total income tax payable (before cess)
- This rebate can be claimed against tax dues from income taxed at a slab rate.
- STCG & LTCG income which are taxed at special rates of 10% and 15% are also eligible for a rebate u/s 87A.
- Exception: LTCG income from equity shares and equity mutual funds are NOT eligible for a rebate u/s 87A. All other LTCG income u/s 112 from other capital assets are eligible for this rebate.
Let’s understand with the help of an example.
Ramesh started working at a supermarket as a salesman on 1st April 2022. He receives a salary of ₹41,000 per month. He was also able to earn ₹10,000 from his savings bank account during the year. He has also invested ₹50,000 in PPF. What is his tax liability?
Solution:
| Particulars | Amount (in ₹) |
|---|---|
| Income from Salary (41,000*12) | 4,92,000 |
| Less: Std Deduction | 50,000 |
| 4,42,000 | |
| Income from Other Sources | 10,000 |
| Gross Total Income | 4,52,000 |
| Less: Chapter VI-A Deductions | |
| 80C (PPF) | 50,000 |
| 80TTA (Savings account interest) | 10,000 |
| Net Total Income | 3,92,000 |
| Tax liability | 7,100 |
| Less: Rebate u/s 87A | 7,100 |
| Tax Payable | 0 |
Let’s say in the above example, in November 2022, he earned LTCG of ₹1,01,000 from the sale of equity shares of Adani. What is his tax liability?
| Particulars | Amount (in ₹) |
|---|---|
| Income from Salary (40,000*12) | 4,92,000 |
| Less: Std Deduction | 50,000 |
| 4,42,000 | |
| Income from Capital Gains | 1,01,000 |
| Income from Other Sources | 10,000 |
| Gross Total Income | 5,53,000 |
| Less: Chapter VI-A Deductions | |
| 80C (PPF) | 50,000 |
| 80TTA (Savings account interest) | 10,000 |
| Net Total Income | 4,93,000 |
| Tax liability | |
| Tax at Normal rate | 7,100 |
| Tax at Special rate | 100 |
| Add: Cess 4% | 4 |
| Less: Rebate u/s 87A | 7,100 |
| Tax Payable | 104 |
From the above tables, we can infer that when his net total income is below 5 lakhs, he has no tax to pay as he is getting a rebate u/s 87A.
However, in the second case, even though his net total income is below 5 lakhs, he is liable to pay a tax of ₹104 as the rebate u/s 87A is not available for LTCG from equity shares.
So, the rebate u/s 87A is a beneficial provision for those with lower incomes.