In order to adequately fund its various activities, functions and responsibilities, the government of a country levies income tax on its citizens. The taxation system for this purpose differs from country to country. In India, this system is progressive, which means that your income tax liability increases in accordance with your annual income. The higher an individual’s income, the greater their share of income tax, and vice versa.
Amidst this tax system, the government also provides means of tax relief to individuals who fall on the lower end of the income spectrum. In this way, the tax system ensures that these individuals are not overtly burdened by taxation and can make ends meet with their limited financial means.
Such means of tax relief are known as tax rebates and one of the most essential tax rebates offered by the Income Tax Act is Section 87A. Let us further explore this means of saving income tax in India.
What is an Income Tax Rebate?
An income tax rebate can simply be understood as a form of refund on taxes that you receive from the Income Tax Department under certain circumstances. An individual is liable to receive a tax rebate in the event that he or she pays more taxes in a financial year than they owe to the government. In order to avail a tax rebate, you must make sure to accurately compute your tax liability and file your tax returns within a particular time period.
Tax Rebate Under Section 87A
The rebate under Section 87A was first proposed in the year 2013 and has been in effect for several years, with it being updated as recently as 2019. Under the latest provisions of Section 87a, any individual with an annual taxable income of up to Rs 5 lakhs is eligible for an income tax rebate of Rs 12,500. This essentially translates to the fact that individuals with an annual income lower than Rs 5 lakhs are entirely exempted from income tax and can effectively save income tax in India.
Section 87A- Then and Now
It is interesting to note that the income tax rebate offered under Section 87A has undergone a number of changes since its introduction in 2013. As recently as the financial year 2018-2019, the income tax rebate under Section 87A was capped at a much lower Rs 2,500. Hence, if your total taxable income was above Rs 3.5 lakhs and your tax liability exceeded Rs 2,500, Section 87A could no longer serve a tax relief purpose for you.
Claiming rebate under Section 87A of the Income Tax Act, 1961
The rebate can be claimed by the taxpayer at the time of filing tax returns, before including education cess on tax liability.
Eligibility to claim rebate u/s 87A:
Here are the criteria you must fulfill to avail tax rebate under Section 87A in FY 2020-2021:
The following table of examples will help you understand the rebate calculation better:
|Total Income of a resident taxpayer||Tax payable before addition of cess||Rebate under Section 87A||Tax Payable after addition of 4% Cess|
How is Income Tax Rebate Calculated?
To calculate the rebate:
1) Calculate Gross Income - Add up income from all sources like salary, capital gains, house rent and income from other sources.
2) Find the Net Taxable Income - Apply deductions under Section 80 to your gross income, as applicable.
3) For net taxable income equal to or less than Rs.5 Lakh, you can claim rebate under Section 87A.
Points to Note About Section 87A
The tax rebate offered under Section 87A can prove to be a great relief to various citizens across the country. However, here are a few points of note that a taxpayer must keep in mind before thinking about saving income tax in India under Section 87A:
The tax rebate offered under Section 87A is certainly a useful means of saving income taxes in India during a financial year. However, it is just important to save taxes with crucial investments such as a life insurance policy that is both tax-saving and financially fruitful.
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Frequently Asked Questions:
1) Are NRIs also eligible to claim a rebate under Section 87A?
Non-resident Indians are not eligible to claim rebate under this section as only the taxpayers qualified as residents are permitted.
2) How can I calculate rebate under 87A?
To calculate rebate under section 87A, calculate your gross income and subtract the available deductions under Sections 80C to 80U. Now, if your net taxable income is less than Rs. 5 lakhs, you are eligible for the rebate upto Rs 12500 on the tax payable before health and education Cess.
3) Can one claim a rebate under section 87A after they have paid their taxes for a FY?
You can claim for a rebate under Section 87A while filing your tax return, in case you have already paid the taxes.
4) Is 87A rebate available on agricultural income?
Yes, resident individuals earning from agricultural sources can also claim tax rebate u/s 87A.
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