The Income Tax Act of 1961 contains several provisions designed to reduce the tax liability of individual taxpayers. As a taxpayer, you need to know what these provisions are and the kind of benefits they offer. In this article, we’re going to look at one such provision - section 87A of the Income Tax Act - and go into detail as to how it can lead you towards lower tax liability.
What is Section 87A of the Income Tax Act of 1961?
Introduced as part of the Finance Bill in 2013, section 87A of the Income Tax Act, 1961 is a provision that provides a rebate to individual taxpayers with total taxable incomes below the specified threshold. However, if the total taxable incomes were above the specified threshold, individual taxpayers would not be eligible for the income tax rebate.
When it was first introduced in 2013 for the financial year 2013-2014 (AY 2014-2015), the maximum amount of rebate allowed under section 87A was limited to ₹2,000. Moreover, this rebate would only apply to individuals whose total taxable income was below ₹5 lakh.
Section 87A Rebate Post Budget FY 23-24 (AY 2024-25)
Since the introduction of Section 87A in 2013, the provision has been revised multiple times. With each revision, the maximum amount of rebate applicable to individual taxpayers was increased.
In the most recent budget announcement that took place in February 2023, the maximum amount of section 87A rebate that individual taxpayers opting for the new tax regime can claim was increased to ₹25,000. This meant that individual taxpayers under the new regime with a total taxable income of ₹7 lakh or less would be eligible for this rebate.
For individual taxpayers under the old tax regime, the maximum amount of rebate that can be claimed has been left untouched at ₹12,500. This effectively means that taxpayers under the old regime with a total taxable income of ₹5 lakh or less would only be eligible for the rebate.
Section 87A Eligibility Criteria (AY 2024-25)
To be eligible for the section 87A rebate, taxpayers must satisfy certain eligibility criteria. Here’s a quick overview of what it is.
- The taxpayer must be an individual.
- The taxpayer must be a resident of India.
- The taxpayer’s total taxable income must not exceed ₹5 lakh (in the case of the old tax regime) and ₹7 lakh (in the case of the new tax regime).
Things to Keep in Mind When Availing the Rebate under Section 87A of the Income Tax Act
As a taxpayer, there are certain points you need to remember when claiming the section 87A rebate.
- The rebate doesn’t apply to non-resident Indians.
- Non-individual entities like companies, partnership firms and Hindu Undivided Families (HUF) cannot claim this rebate.
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- Resident individual taxpayers falling under the senior citizen category (above 60 years but below 80 years of age) are eligible for the section 87A rebate.
- Resident individual taxpayers falling under the super senior citizen category (above 80 years of age) are not eligible for the Section 87A rebate.
Income Tax Rebate under Section 87A: Examples
Let’s take a look at a few examples to understand how the rebate under section 87A of the Income Tax Act, 1961, works for resident individuals opting for both the old tax regime and the new tax regime.
Old Tax Regime
Assume there are 2 individuals - Mr A and Mr B. Both of them have opted for the old tax regime. Mr A is 33 years old, whereas Mr B is 62 years old. The breakdown of their income and other tax-saving investments are as follows.
| Particulars | Mr A | Mr B |
| Income From Salary (A) | ₹4,50,000 | NIL |
| Income From House Property (B) | NIL | ₹4,00,000 |
| Income From Other Sources (C) | ₹25,000 | ₹2,30,000 |
| Total Income (A + B + C) | ₹4,75,000 | ₹6,30,000 |
| Deductions under Chapter VI (A) of the Income Tax Act | ₹40,000 | ₹1,50,000 |
| Total Taxable Income | ₹4,35,000 | ₹4,80,000 |
Since the total taxable income of both Mr A and Mr B are below ₹5,00,000, both of them are eligible for the rebate under section 87A. However, the amount of rebate they’re eligible for would differ. Here’s how much rebate Mr A and Mr B are eligible for.
| Particulars | Mr A | Mr B |
| Total Taxable Income | ₹4,35,000 | ₹4,80,000 |
| Income Tax @ 5% (for total taxable income above ₹2.5 lakh but below ₹5 lakh) | ₹9,250
[(₹4,35,000 - ₹2,50,000) * 5%] |
₹9,000
[(₹4,80,000 - ₹3,00,000) * 5%] |
| Rebate under Section 87A | ₹9,250 | ₹9,000 |
New Tax Regime
Assume there are 2 individuals - Mr C and Mr D. Both of them have opted for the new tax regime. Mr A is 40 years old, whereas Mr B is 73 years old. The breakdown of their income and other tax-saving investments are as follows.
| Particulars | Mr A | Mr B |
| Income From Business (A) | ₹4,50,000 | NIL |
| Income From House Property (B) | ₹1,50,000 | NIL |
| Income From Other Sources (C) | NIL | ₹7,00,000 |
| Total Taxable Income (A + B + C) | ₹6,00,000 | ₹7,00,000 |
The total taxable income of both Mr C and Mr D is below ₹7,00,000. This makes them both eligible for the rebate under section 87A. Let’s calculate the amount of rebate they’re eligible for.
| Particulars | Mr A | Mr B |
| Total Taxable Income | ₹6,00,000 | ₹7,00,000 |
| Income Tax @ 5% (for total taxable income above ₹3 lakh and up to ₹6 lakh) [A] | ₹15,000
[(₹6,00,000 - ₹3,00,000) * 5%] |
₹15,000
[₹3,00,000 * 5%] |
| Income Tax @ 10% (for total taxable income from ₹6 lakh and up to ₹9 lakh) [B] | NIL | ₹10,000
[₹1,00,000 * 10%] |
| Total Income Tax Liability [A + B] | ₹15,000 | ₹25,000 |
| Rebate under Section 87A | ₹15,000 | ₹25,000 |
Also Read More About Old Tax Regime vs New Tax Regime
Conclusion
The section 87A rebate that the Income Tax Act, 1961 provides is a useful provision that helps individual taxpayers reduce their liability. However, it is essential to keep in mind that this rebate is only applicable to those whose total taxable income is below the specified threshold limit. If the income is above the specified limit, the rebate will not be applicable and the tax will be levied on the total taxable income.