Income Tax: Tax filing can be a tedious process as there are various slabs and exemptions one needs to keep in mind. Tax planning is essential as it helps in reducing tax liability. There are various options available under the income tax act that gives taxpayers benefits for saving tax. Tax rebate is one such benefit provided by the government.

What is a tax rebate?

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A tax rebate is the refund of taxes when the individual's tax liability is less than the taxes paid. Simply put, if the taxpayer comes under the limit of a tax rebate, he/she will get the whole tax amount back at the end of the fiscal year by claiming the benefit of the rebate under section 87A. However, salaried individuals and other taxpayers must not confuse this with the basic exemption limit under the new tax regime.

The Budget 2023 has hiked the basic exemption limit to Rs 3 lakh from Rs 2.5 lakh under the new tax regime, while for the old tax regime, the minimum basic exemption of Rs 2.5 lakh and the tax rebate of Rs 5 lakh remains the same. Thus, an individual's income becomes taxable if it exceeds Rs 3 lakh under the new tax regime and Rs 2.5 under the old tax regime in FY 23- 2024.

In Budget 2023, Finance Minister Nirmala Sitharaman announced an increase in the tax rebate limit from Rs 5 lakh to Rs 7 lakh for the new tax regime to make it more attractive. Let us have a closer look at the tax rebate and Section 87A.

Who can claim a rebate under section 87A?

Individual taxpayers are eligible for a rebate under Section 87A provided their total taxable income does not exceed Rs 5 lakh in case they have chosen the old tax regime and Rs 7 lakh in case of the new tax regime for the fiscal year 2023-24. It means that if an individual's total taxable income exceeds the rebate limit, they will be unable to claim the tax benefit under section 87A.

Only resident Indians can take advantage of section 87A.

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How much rebate is allowed under section 87A?

Taxpayers choosing the new tax regime for any financial year till FY 2022-23 (ending on March 31, 2023) would be eligible for a tax rebate of Rs 12,500 if their taxable income does not exceed Rs 5 lakh in a financial year. Similarly, even in the case of the old tax regime, a tax rebate of Rs 12,500 is available for a taxable income of up to Rs 5 lakh.

Under the Budget 2023, the tax rebate under Section 87A has been hiked to Rs 25,000 for taxable income up to Rs 7 lakh for the new tax regime. Thus, an individual opting for the new tax regime in FY 2023-24 will pay zero taxes if their taxable income does not exceed Rs 7 lakh.

How to claim rebate benefits under 87A?

Step 1: Calculate the gross income for the year

Step 2: Reduce all the deductions– standard deductions, tax savings etc

Step 3: Declare the income after deductions and tax deductions in the Income Tax Return (ITR)

Step 4: Claim a tax rebate under section 87A if your total income does not exceed Rs 5 lakh.

Remember, the maximum rebate under section 87A for the AY 2022-23 is Rs 12,500.

To put things into perspective, refer to the table given below:

Source of income (FY 2021-22) Income (Rs)
Gross total income 6,50,000
Less: Deduction* under section 80C 1,50,000
Total income 5,00,000
Income-tax (@ 5% from Rs 2.5 to 5 lakh) 12,500
Less: Rebate u/s 87A 12,500
Tax payable Nil

Points to remember before applying for section 87A

-The rebate can only be applied to the total tax before adding health and education cess.

-Senior citizens above the age of 60 and below the age of 80 years can avail of the benefit under section 87A, but super senior citizens above the age of 80 are not eligible for the claim.

-Section 87A rebate is available under both the old and new tax regimes.

-For FY 2023-24, the rebate limit of Rs 7 lakh in the new tax regime is applicable. For FY 2022-23, the tax rebate limit is Rs 5 lakh for both regimes.

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