Income Tax Rebate Under Section 87A

A tax rebate is a tax relief provided to individuals, particularly those in the lower-income bracket to ensure that they are not burdened with income tax if their income is below a certain threshold. 

A tax rebate is available on income up to Rs. 7 lakh under the new tax regime and up to Rs. 5 lakh under the old regime.

In this article, we will discuss about the following:

• Income Tax Rebate
• Rebate Allowed
• Steps to claim Rebate
• Important points
• Eligibility
• Rebate limit for different FYs
• FAQs

Rebate u/s 87A for FY 2024-25 (AY 2025-26)

The rebate under Section 87A is available to individual taxpayers whose income does not exceed the specified threshold. The limit is Rs. 7 lakh under the new tax regime and Rs. 5 lakh under the old regime. If your income falls within these thresholds, your tax liability will be reduced to zero.

How Much is the Rebate Allowed u/s 87A?

If an individual's total taxable income is up to Rs.7 lakh and chooses the new tax regime, they will be eligible for rebate of lower of the following:

• an amount of income tax payable on his total income or
• an amount up to Rs 25,000 

Whereas a resident individual paying tax under optional tax regime (shifting out of the new tax regime) and having a total taxable income of less than Rs 5 Lakh, rebate shall be lower of the following:

• an amount equal to the amount of income tax payable on his total income or
• an amount of Rs 12,500.

Under the new tax regime, in addition to above one more rebate cover is also available for individuals having total income just above Rs. 7 lakhs.

If the income of an individual exceeds Rs 7,00,000 and tax payable on such income is exceeding the income amount over and above Rs.700,000, then the tax will be limited to the extent of such income exceeding Rs. 7 lakhs. 

Step I – Calculate excess above Rs. 7 lakhs Total income – Rs 7 Lakh (A)

Step II  - Compute income-tax liability on total income (B)

Step III – if B>A rebate under section 87A would be  (B-A).

Let’s try to understand this with below example

Mr. Ravi aged 36 years and a resident in India, has a total income of Rs 7,15,000, comprising his salary income and interest on bank fixed deposit. The tax liability for AY 2024-25 under the new tax regime is as follows.

Solution : 

Steps to Claim a Tax Rebate Under Section 87A

• Calculate your gross total income for the financial year
• Reduce your tax deductions for tax savings, investments, etc.
• Arrive at your total income after reducing the tax deductions.
• Declare your gross income and tax deductions in ITR.
• Claim a tax rebate under section 87A if your total income does not exceed Rs 7 lakh under the new tax regime &  5 lakh for the old tax regime (shifting out of the default tax regime)
• The maximum rebate under section 87A for the AY 2024-25  is Rs 25,000 under the new tax regime and Rs 12,500 under the optional tax regime.

See the example below for rebate calculation under Section 87A. 

Under the new tax regime, for individuals below 60 years of age for AY 2024 -25

* Deduction under section 80C is not eligible for the taxpayer who pays tax under the new tax regime .

Under the old tax regime, For individuals below 60 years of age for AY 2024-25 

Things to Remember while Availing Rebate under Section 87A

• The rebate can be applied to the total tax before adding a health and education cess of 4%
• Only resident individuals are eligible to avail rebate under this section.
• Senior citizens above 60 years and below 80 years of age can avail a rebate under Section 87A
• The amount of rebate will be lower than the limit specified under Section 87A or total income tax payable (before cess)
• Section 87A rebate is available under the old and the new tax regime

Rebate against various tax liabilities

Section 87A rebate can be claimed against tax liabilities on:

• Normal income which is taxed at the slab rate
• Long-term capital gains under Section 112 of the Income Tax Act. (Section 112 applies for long-term capital gains on the sale of any capital assets other than listed equity shares as well as equity-oriented schemes of mutual funds)
• Short-term capital gains on listed equity shares and equity-oriented schemes of mutual funds under Section 111A of the Act, on which tax is payable at a flat rate of 15%.

Note: Rebate under Section 87A cannot be adjusted against tax on long-term capital gains on equity shares and equity-oriented mutual funds (Section 112A).

Eligibility to Claim Rebate u/s 87A for FY 2022-23 

You can claim the benefit of rebate under section 87A for FY 2022-23 under both the tax regimes, subject to the following conditions are satisfied:

• You are a resident individual
• Your total income after reducing the deductions under Chapter VI-A (Section 80C, 80D and so on) does not exceed Rs 5 lakh in a FY

The tax rebate is limited to Rs 12,500. If your total tax payable is less than Rs 12,500, you will not have to pay any tax. 
Note that the rebate will be applied to the total tax before adding the health and education cess of 4%.  

Here are a few calculations of Section 87A rebate for resident individuals (below 60 years of age) earning various levels of income:  

Example 1 
Mr Ram (age 62 years and resident) is a retired person earning a monthly pension of Rs 5,000. He invested in equity-oriented funds in December 2013 and sold the same in June 2021. 
Taxable LTCG amounted to Rs 4,70,000. Apart from pension income and gain on equity-oriented funds, he does not have any other income. What will be his tax liability for the year 2021-22? 

Mr Ram is above 60 years, but below 80 years, the basic exemption limit is Rs 3 lakh. Further, he can adjust the basic exemption limit against LTCG on equity-oriented funds. However, the adjustment should be made against normal income, i.e. other than LTCG on equity-oriented funds. In this case, he has a pension income of Rs 60,000 (Rs 5,000 × 12) and LTCG on equity-oriented funds of Rs 4.7 lakh.  

Thus, after adjusting the basic exemption limit with the pension income, adjust the balance limit of Rs 2.4 lakh against LTCG. 
The balance of Rs 2.4 lakh (Rs 3 lakh – Rs 60,000) will be adjusted against LTCG. Hence, after adjustment with LTCG on equity-oriented funds, the balance LTCG left is Rs 2.3 lakh (Rs 4.7 lakh – Rs 2.4 lakh).  
LTCG on equity-oriented funds is taxable at 10% on the LTCG above Rs 1 lakh, hence 10% tax is levied on Rs 1.3 lakh (Rs 2.3 lakh – Rs 1 lakh). A tax of Rs 13,000 is payable. 

Rebate under Section 87A will not be adjusted against tax on LTCG of equity-oriented funds (Section 112A). 
Hence, Mr Ram would be liable to pay a tax of Rs 13,000 plus health & education cess @ 4%.

Eligibility to Claim Rebate u/s 87A for FY 2018-19 and FY 2017-18

For FY 2017-18 or FY 2018-19, the eligibility criteria to claim tax rebate under Section 87A were:

• You are a resident individual
• Your total income after deductions under Chapter VI-A (Section 80C, 80D, 80E and so on) is less than Rs 3.5 lakh

The amount of the tax rebate was limited to Rs 2,500. So, if your tax payable did not exceed Rs 2,500, then you would have to pay tax.

Note that the tax rebate will be applied to the total tax before adding the health and education cess of 4% (FY 2018-19) or education cess of 3% (FY 2017-18).

Here are a few examples of Section 87A rebates for resident individuals for FY 2017-18 and FY 2018-19:

**Tax payable for FY 2017-18 will be Rs 2,575 i.e. Rs 2,500 + 3% cess and 
tax payable for FY 2018-19  will be Rs 2,600 i.e. Rs 2,500 + 4% cess

Rebate Limit Under Section 87A for All the Financial Years

Related Content:
Section 80E - Deduction for Interest on Education Loan
Income Tax Deductions List
Section 80EE - Deduction for Interest on Home Loan
Section 80U – Tax Deduction for Disabled Individuals