Rebate: the Backdrive of Income Tax.
The Government of every country requires funding to aid its necessary functions and duties. These include operating public institutions, developing the country’s infrastructure and financing public welfare initiatives & schemes. In exchange for providing these amenities, a government generates the revenue required for them by taxing its citizens.
To make this process efficient, every country has a proper taxation process laid out by its government. India, with its wide distribution of income earners and sources of revenue, is no different. The taxes help government to build the infrastructure of the nation. However, Indian tax law also offers many provisions to reduce tax liabilities; and Section 87A of the Income Tax Act, 1961 is one of those provisions. This section is covered under Chapter VIII of Income Tax discuss about Rebates and Relief.
Before going into provisions lets understand the meaning and basics of rebates. 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.Such means of tax relief or refunds are known as tax rebates and one of the most essential tax rebates offered by the Income Tax Act is Section 87A. Before Year 2006; there were several other Rebates in Section 88; like rebate on Life Insurance Premium, Investment in new shares, for individual of 65 years or more, for women below 65 years, etc.; but now most of them are covered under Chapter VI A.
Rebate u/s 87A
The bare act reads as “87A. An assessee, being an individual resident in India, whose total income does not exceed [five hundred thousand] rupees, shall be entitled to a deduction, from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to hundred per cent of such income-tax or an amount of [twelve thousand and five hundred] rupees, whichever is less.”
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.
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 2019-20, the income tax rebate under Section 87A was capped at Rs 12,500. Hence, if your total taxable income was above Rs 5 lakhs and your tax liability exceeded Rs 12,500, Section 87A could no longer serve a tax relief purpose for you.
Noteworthy points for Section 87A of the Income Tax Act, 1961:
Some of the points are:-
- The amount of deduction that can be claimed under this section is either 100% of the income tax liability or Rs. 2,500 (whichever is lower).
- The rebate is applicable to total tax prior to adding the educational cess of 4%.
- Only individuals are eligible to avail rebate under this section. Companies, firms or Hindu Undivided Family cannot claim this rebate.
- Super senior citizens (individuals above the age of 80 years) are not eligible for a rebate under Section 87A.
- Only Indian residents are permitted to claim this rebate, NRIs are not allowed rebate under Section 87A.
- In case you have already paid the taxes and qualify for tax rebate under Section 87A, you can claim for a refund while filing your tax return.
- Rebate u/s 87A is not available on sale or transfer of equity shares i.e. on Long Term Capital Gains from equity or others as specified under section 112A. It is available on all other capital gains.
Some examples for better understanding
For F.Y. 2018 – 2019 (A.Y. 2019 – 2020)
| Total Income | Tax payable before cess | Rebate u/s 87A | Tax Payable after cess |
| 2,75,000 | 1,250 | 1,250 | 0 |
| 3,00,000 | 2,500 | 2,500 | 0 |
| 3,50,000 | 5,000 | 2,500 | 2,500+100 = 2,600 |
For F.Y. 2019 – 2020 (A.Y. 2020 – 2021)
| Total Income | Tax payable before cess | Rebate u/s 87A | Tax Payable after cess |
| 2,75,000 | 1,250 | 1,250 | 0 |
| 3,00,000 | 2,500 | 2,500 | 0 |
| 4,90,000 | 12,000 | 12,000 | 0 |
| 10,00,000 | 1,12,500 | 0 | 1,12,500 +4,500 = 1,17,000 |
Conclusion
The tax rebate u/s 87A is certainly a useful means of saving income taxes under income tax act, however this provision sets a mental bar in an individual’s mind for declaring income upto Rs 5 lakh only. The assesses should take proper use of chapter VI A provisions for better tax planning, like life insurance policies, EPFs, Medical insurance etc. which are both tax saving and financially fruitful.
Disclaimer: Entire content of the post is review of prevailing provisions of law, based on personal experience of author and as per information existing at the time of publishing of this post. This is just for the general information, kind attention is drawn to recent amendments & notification thereby.
About the Author: This is an integral part of study & research work of Mr. Varun, Team Member, N Mehta & Associates.
