Unless you’ve been living under a rock, you’ve probably heard this “No tax on income up to ₹12 lakh under new regime.”
But the moment you look at the actual tax slabs,
Up to ₹4L → 0%
₹4L to ₹8L → 5%
₹8L to ₹12L → 10%
and so on…you’d be like, there’s definitely tax here, so how is income up to ₹12 lakh tax free?
Well, that’s because the government provides something called as tax rebate under section 87A.
What is tax rebate u/s 87A?
Imagine you’re driving on a highway. Every car that passes a certain checkpoint has to pay a toll, say ₹100. But there’s a rule: if your car is under 4 metres in length, you don’t have to pay.
You still go through the toll booth. They check your vehicle, calculate the toll… but then wave it off because you qualify. But if your car is even slightly over 4 metres? No benefit. You pay the full amount.
This is exactly how tax rebate works. It is a tax relief for people whose income falls within a specified limit.
How much rebate is allowed under Section 87A?
The amount of rebate you can claim depends on the tax regime you choose.
a) Tax rebate under new regime
If you opt for new regime, income up to ₹12 lakh becomes completely tax free i.e. you get a tax rebate of up to ₹60,000. This means if your total tax is ₹60,000 or less, it will be reduced to zero.
For FY 2024-25, the income threshold to claim rebate under new regime is ₹7 lakh.
b) Tax rebate under old regime
For those opting for old regime, the maximum income up to which rebate is allowed is ₹5 lakh. So, if your total tax is within ₹12,500, it becomes zero.
Next, let’s see how is rebate applied when calculating taxes.
How is 87A tax rebate applied?
So firstly, you have to calculate your total income, and the tax liability based on slabs.
Then if your income is within the specified limit for tax rebate, your effective tax payable would become zero.
Here’s an example to understand this better:
Who can claim the rebate under Section 87A?
The tax rebate is available only to resident individuals and other category of taxpayers like NRIs or HUFs are not eligible for this benefit.
Further, it’s important to note that rebate is allowed only against income taxed at normal slab rates while those taxed at special rates (such as capital gains from equity or lottery winnings) don’t get this benefit.
So, say you’ve ₹10L in salary and ₹1L in crypto profits, there won’t be any tax on the salary but crypto profits will be taxed at 30% despite your total income is below ₹12 lakh.
Now whenever we talk about tax rebate, there’s another concept called marginal relief that’s closely tied to it. Let’s cover it in brief.
What is marginal relief?
We know that the rebate is available only if your income is up to ₹12 lakh. But suppose your income is ₹12,01,000, just a thousand rupees over the limit.
What happens in this case? You’d end up losing the rebate benefit and pay tax based on slab rates, which comes around ₹60k.
So while your income only increased by ₹1k, your tax liability shot up by ₹60k. Essentially, you end up paying more tax than someone earning just below the limit. That doesn’t seem fair, right?
That’s where marginal relief comes in. It ensures that the tax you pay is not more than the extra income you earned above the rebate limit.
You can read more about marginal relief here.
Lastly, let’s look at a few FAQs on tax rebate.
FAQs on tax rebate u/s 87A
1. What is the difference between rebate and deduction?
A deduction reduces your taxable income. For example, if you invest in ELSS or pay life insurance premiums under Section 80C, that amount is deducted from your income before calculating tax. A rebate, on the other hand, is applied after your tax is calculated, such that it reduces the final tax amount you have to pay.
2. Is income tax rebate u/s 87A available on long-term capital gains (LTCG) from stocks?
87A rebate isn’t allowed against any income that’s taxed at special rate. Hence, you can’t claim rebate if you’ve gains from equity shares or mutual funds.
3. Can NRIs claim rebate u/s 87A?
No, NRIs are not eligible to claim the rebate under Section 87A.
4. Are senior citizens allowed to claim rebate u/s 87A?
Senior citizens above 60 years and up to 80 years of age are eligible to claim rebate u/s 87A. However, super senior citizens above 80 years are not allowed to claim the rebate.