Income Tax Rebate: It's Types and Application Process

2024-08-02

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Taxes are one of those universal facts which nobody likes but have to deal with it anyway. Usually, you end up paying taxes directly and indirectly. While you may not have much of a say in the indirect taxes as they are based on the money you spend, you can use tax rebates for direct taxes.

Income tax rebate allows you to reduce your direct tax liability legally and without hiding your income. The majority of tax rebates are available on transactions that are either too important to ignore in life, or for your long-term investments.

So, the money you use to claim an income tax rebate mostly remains in your pocket, while you also save tax because of it.

Here are income tax rebates in detail…

Key Takeaways

Tax rebates help reduce the total tax liability, making them beneficial for taxpayers.
Various sections under the Income Tax Act provide rebates based on income level, investments, and expenses.
Choosing between the old and new tax regimes impacts the availability of rebates.
Proper documentation and timely filing of income tax returns are crucial to claiming rebates.

What is Income Tax Rebate?

A tax rebate is a refund that you are eligible for if the taxes paid by you exceed your tax liability. For example, if your tax liability is amounting to Rs. 20,000, but if the bank pays the Government a TDS that amounts to Rs. 30,000 on your behalf, you are eligible for a tax rebate.

In other words, you will avail a refund on tax money at the end of every financial year if your tax liability is less than that of the amount paid by you. You need to file an Income Tax Rebate within a specified period if you want to claim the income tax refund.

Fortunately, the Indian Income Tax Act is full of options for you to save much of your income from tax. You can use the many tax rebates available in the act to reduce your annual direct tax liability. The only condition for claiming the income tax rebate is that you file the income tax return religiously. Since the income tax rate in this country is progressive, higher-income attracts direct tax at higher rates.

Thus, based on your rate of taxation, you can save from anywhere between Rs 12,500 to Rs 1.25 lakhs using the income tax rebates. Most of the transactions eligible for tax rebates are investments for long-term goals, financial safety for the family in emergencies or necessary education or home expenses.

Eligibility to Claim Tax Rebate in India

The only way to get income tax rebate is through filing an ITR at the end of the fiscal year. Although, there can be few cases –

1. If your gross income is less than 5 Lakhs, then in that case filing an ITR will be useful.

2. But, if your gross income is more than 5 Lakhs, then you will have to take the help of a tax deduction system that comes under Section 80C, Section 80D, 80CCD, etc. to reduce your taxable income.

3. Also, people with a gross income of up to 5 Lakhs need to know that they are also eligible for a full tax rebate.

How to Claim an Income Tax Rebate?

Here is a detailed step to claim an income tax rebate.

1. Check Eligibility

Before claiming a rebate, ensure that you meet the eligibility criteria. For instance, Section 87A provides a rebate for individuals with a taxable income of up to ₹5 lakhs. Eligibility varies based on the rebate section being claimed.

2. Calculate Taxable Income

Compute your total taxable income after accounting for deductions and exemptions. This helps in determining whether you qualify for a rebate and how much rebate you can claim.

3. Identify the Relevant Rebate Section

Different rebates apply based on income type and tax-saving investments. Identify which section under the Income Tax Act applies to your situation, such as Section 80C for investments or Section 80D for health insurance.

4. Gather Necessary Documents

To claim rebates, collect relevant documents like salary slips, Form 16, investment proofs, and premium receipts for insurance policies. Proper documentation ensures smooth processing and avoids tax scrutiny.

5. File Your Income Tax Return

Rebates can only be claimed when filing your Income Tax Return (ITR). Ensure that the correct rebate section is mentioned and that Form 10E is submitted where required. File your return before the due date to avoid penalties.

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How to Calculate Income Tax Rebate?

Before you file your income tax return, you must be wondering whether you will be eligible for an Income Tax rebate or not?

The answer to this question depends on the slab in which the income you earn falls in. To calculate your gross taxable income, you need to add all your sources of income and factoring in the deductions that are possible.

Let’s take the following cases

According to the Income Tax Act 1961, if your gross taxable income is below Rs 5 lakhs per annum, then you can claim tax rebate u/s 87A. As per section 87A you can claim a tax rebate of up to Rs 12,500 via tax SOP.

While on the other hand, your annual income is more than Rs 5 Lakhs, then you will be taxed as per the slab rate. You will not be eligible for a refund u/s 87A. Refund, in this case, will be provided if you have paid more than your tax liability. However, you can still take into consideration deductions offered by sections 80C, 80D etc.

To understand the calculation of rebate in both the above-listed cases better, let’s take an example of the income of 2 friends, Raju and Shyam.

Particulars	RAJU	SHYAM
Salary (per year)	6 lakhs	10 lakhs
Deductions claimed	1 lakh	1.5 lakh
Gross Taxable Income	Rs 5 lakh	Rs 8.5 lakh
Income Tax Slab	Rs 2.5 L - 5 L	Rs 5 L – 10 L
Tax Implication	Rs 12,500	Rs 82,500
Eligible for rebate u/s 87A	Yes	No
Rebate	Rs 12,500	-
4% Higher Education Cess	-	Rs 3300
Total Tax Liability	Rs 0	Rs 85,800

Now we have seen that the tax liability of Raju is nil while Shyam has to pay Rs 85,800. While filing the tax they paid Rs 5000, and Rs 1,00,000 each as they were unaware of some deductions.

Particulars	RAJU	SHYAM
Amount Paid	Rs 5000	Rs 1 lakh
Tax Refund	Rs 5000	Rs 14200

Did You Know?

If your taxable income is up to ₹5 lakh, you can claim a rebate of up to ₹12,500 under Section 87A—meaning zero tax under the old regime.

Source: Clear Tax

Types of Tax Rebates in India

Indian Income Tax Act provides for multiple types of tax rebates. While most under sections 80C and 80D relate to investment and expenses, other rebates are also available for specific transactions and even incomes:

1. Investments in PPF, ELSS, and LIC - Section 80C

Section 80C allows a deduction of up to ₹1.5 lakhs on specific investments like the Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), Life Insurance Premium (LIC), and Employee Provident Fund (EPF). This is one of the most commonly used tax-saving options.

2. Health Insurance Premiums - Section 80D

Under Section 80D, taxpayers can claim a rebate on health insurance premiums paid for themselves, their spouses, children, and parents. The maximum deduction is available is ₹25,000, which increases to ₹50,000 for senior citizens.

3. Interest on Education Loan - Section 80EE

Section 80EE allows you to get a tax rebate on the interest payment of a loan you take to purchase a house property.

The maximum deduction is Rs 50,000

Eligibility:

The following are the criteria’s you need to fulfil if you want to take benefit of deductions under Section 80EE

The loan that you have taken should be sanctioned between 01.04.2016 to 31.03.2017 from any financial institution
The loan amount should not be more than Rs 35 Lakhs
The house brought through the home loan must be the only house that you own at the time of sanctioning the loan.

4. Deduction for Scientific Research - Section 80GGA

This section involves deductions concerning donations made by you for scientific research. You can avail of a tax deduction of up to 100% of the amount donated.

Eligibility:

The deduction should be made to an approved scientific research association.
If paid by cash, then a deduction of only Rs 10,000 will be allowed

5. Savings Bank Interest - Section 80TTA

A deduction that you can avail for the interest on deposits payable in your saving account. This income tax deduction can be claimed by an individual as well as in HUF for up to Rs 10,000

Eligibility:

Income must be earned via savings account only (time deposits are not valid)

6. Capital Gains Rebate - Section 54

This section relates to profit on the sale of property that you use for residence. The whole of the capital gain can be exempt if it is fully utilised.

Eligibility:

To be eligible, you must purchase another residential property, 1 year before or 2 years after you sell the property.
There is a lock-in period of 3 years. That is you can avail exemption if you have held the property for at least 3 years.

7. Long - Term Capital Gains Rebate - Section 54 EC

If you invest the capital gain made through the sale of land, buildings etc in certain bonds, then you can avail exemption.

Eligibility:

The maximum investment in bonds must not be more than Rs 50 lakhs in a financial year.
You should invest the capital gain in bonds within 6 months of selling
Bonds must be long-term, that is redeemable after at least 3 years

The bonds in which you can invest

NHAI
RECL
Central Govt Bonds

8. Home Loan Interest Payment - Section 24B

This section allows deduction of the interest that you pay towards the home loan. The maximum deduction you can avail of in the case of self-occupied property is Rs 2 lakhs.

Conditions:

The deduction has the following rules/conditions

You can avail of a deduction of up to Rs.30,000 if the house property is bought, constructed, renewed, repaired or reconstructed before 1st April 1999.
You can avail of a deduction of up to Rs.1.5 lakhs if you borrow for property bought or constructed within 3 years from borrowing. However, the amount should be borrowed after 1st April 1999.
Up to Rs.30,000 is exempted if the home loan is taken for renewing, repairing or reconstructing the house. The home loan should be taken after 1st April 1999.
Up to Rs.30,000 is exempted if the house is constructed or bought after 3 years of taking the loan. The money must be borrowed after 1st April 1999.

9. House Rent Allowance Exemption - Section 10(13A)

This section is related to the house rent allowance or HRA. It is given by the employer so that the employee can meet his rent expenses.

HRA is exempt to the minimum of following

Actual HRA received by you
Rent paid over 10% of salary
50% of the salary in metros and 40% for other cities

No HRA is included if no rent is paid and the employee lives in his own house.

For every citizen of India, it is advisable to pay income tax before its due date. Failing to do so would lead to several consequences such as heavy fines and imprisonment under the IT Act.

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Old Tax Regime vs. New Tax Regime: Which Offers Better Rebates?

Choosing between the old and new tax regimes can significantly impact your tax savings. Let’s compare both to understand which one offers better rebates for you.

Advantages of the New Tax Regime

Lower tax rates compared to the old regime.
Simpler tax structure with fewer compliances.
No need to invest in specific instruments for tax benefits.

Disadvantages of the New Tax Regime

No major rebates or deductions are available, such as Section 80C and 80D.
Limited scope for tax savings through investments.
This might result in higher tax liability for individuals who rely on deductions.

Key Rebates Under the Old Tax Regime

Section 80C for investments.
Section 80D for health insurance.
Section 24(b) for home loan interest.
Section 87A for income up to ₹5 lakh.

Key Points to Remember While Claiming Tax Rebates

Ensure that you choose the correct tax regime before filing ITR.
Maintain all investment and expenditure proof to support your rebate claims.
Verify the correct sections while filing tax returns to avoid rejection or penalties.
File ITR before the deadline to ensure smooth processing of tax rebates.

Difference Between Tax Deduction and Tax Exemption

Tax deduction and tax exemption are often used interchangeably, but they serve different purposes in reducing your taxable income.

What is a Tax Deduction?

A tax deduction reduces taxable income based on eligible expenses or investments. For example, deductions under Section 80C and 80D lower the total income before tax computation.

What is Tax Exemption?

A tax exemption allows certain types of income to be completely free from tax. For example, agricultural income and PPF interest earnings are exempt from taxation.

Conclusion

Understanding income tax rebates can significantly reduce tax liability and improve financial planning. While the new tax regime offers lower rates, the old regime provides better rebates and deductions. Taxpayers should evaluate both options carefully, maintain necessary documentation, and file returns on time to maximise benefits.

Glossary

Tax Rebate: A partial refund in the amount of tax you owe, based on eligibility criteria.
Section 80C: A provision that allows deductions up to ₹1.5 lakh annually for certain investments.
Section 80D: Provides tax deductions on health insurance premiums paid for self, spouse, children, and parents.
Tax Deduction: An amount subtracted from your gross income to reduce taxable income based on eligible expenses or investments.
Tax Exemption: Income that is completely excluded from taxation, such as agricultural income or PPF interest.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.