A tax rebate serves as financial relief for individual taxpayers, particularly those in lower income brackets, by reducing their tax burden when their income remains below a specified threshold.
Budget 2025 Update
For the financial year 2025-26, the rebate available under the new tax regime has been raised to Rs. 60,000. This rebate is applicable for individuals with income up to Rs. 12 lakh under the new tax system. However, this benefit does not apply to income taxed at special rates. Additionally, marginal relief on rebate continues to be available. Further details on this provision are provided below.
Income Tax Rebate Under Section 87A
Under Section 87A, individuals whose taxable income does not exceed a specified limit are eligible for a tax rebate. For FY 2024-25 (AY 2025-26), the applicable limits are:
- Up to Rs. 7 lakh under the new tax regime
- Up to Rs. 5 lakh under the old tax regime
If taxable income remains within these limits, the individual's tax liability is reduced to zero.
Rebate Permitted Under Section 87A
Under the new tax regime, taxpayers with total taxable income up to Rs. 7 lakh are eligible for a rebate, which is the lower of:
- The total tax payable on their income, or
- Rs. 25,000
For resident individuals opting for the old tax regime with taxable income below Rs. 5 lakh, the rebate is the lower of:
- The total tax payable on their income, or
- Rs. 12,500
Additionally, individuals earning slightly above Rs. 7 lakh under the new tax regime may qualify for marginal relief.
Marginal Relief on Rebate
If an individual's income marginally exceeds Rs. 7 lakh and the tax liability surpasses the excess income over Rs. 7 lakh, marginal relief is granted.
Steps to Compute Marginal Relief:
- Determine excess income: Subtract Rs. 7 lakh from total income.
- Calculate tax liability: Compute tax on the total income.
- Compare tax liability with excess income: If the tax liability exceeds the excess amount, the rebate equals the difference.
Example:
Mr. Amit, a 36-year-old Indian resident, has a total income of Rs. 7,15,000, including salary and fixed deposit interest. His tax computation under the new tax regime is as follows:
- Excess income: Rs. 15,000 (Rs. 7,15,000 - Rs. 7,00,000)
- Tax on Rs. 3,00,000 – Nil
- Tax on the next Rs. 3,00,000 @ 5% – Rs. 15,000
- Tax on balance Rs. 1,15,000 @ 10% – Rs. 11,500
- Total tax liability: Rs. 26,500
- Marginal relief: Rs. 11,500 (since Rs. 26,500 - Rs. 15,000 = Rs. 11,500)
- Final tax payable: Rs. 15,600 (including 4% health & education cess)
How to Claim Tax Rebate Under Section 87A
- Compute gross total income.
- Deduct eligible tax-saving investments and deductions.
- Determine taxable income after deductions.
- Report gross income and deductions in the Income Tax Return (ITR).
- If taxable income does not exceed Rs. 7 lakh (new tax regime) or Rs. 5 lakh (old tax regime), claim the rebate under Section 87A.
Key Points for Claiming Rebate Under Section 87A
- The rebate is applied before adding the 4% health and education cess.
- Only resident individuals qualify for this rebate.
- Senior citizens aged between 60 and 80 years are eligible.
- The rebate is restricted to the lower of the tax payable or the maximum rebate amount under Section 87A.
- The rebate applies to both old and new tax regimes.
Applicability of Section 87A Rebate
The rebate under Section 87A can be claimed against:
- Tax on regular income taxed at slab rates
- Long-term capital gains (LTCG) under Section 112 (excluding equity-oriented mutual funds and shares under Section 112A)
- Short-term capital gains on equity shares and mutual funds (taxed at 15% under Section 111A)
Eligibility Criteria for FY 2022-23
For FY 2022-23, the rebate was available to resident individuals with taxable income up to Rs. 5 lakh, with a maximum rebate of Rs. 12,500.
Example:
Ms. Priya, aged 45, has a taxable income of Rs. 4,90,000. Her tax liability before rebate is Rs. 12,000. Since her income is within the Rs. 5 lakh limit, she can claim a rebate of Rs. 12,000, reducing her tax payable to zero.
Rebate Limit for Different Financial Years
| Financial Year | Maximum Taxable Income | Maximum Rebate Allowed |
| 2023-24 | Rs. 7,00,000 (New Tax Regime) | Rs. 25,000 |
| 2023-24 | Rs. 5,00,000 (Old Tax Regime) | Rs. 12,500 |
| 2022-23 | Rs. 5,00,000 | Rs. 12,500 |
| 2018-19 | Rs. 3,50,000 | Rs. 2,500 |
| 2017-18 | Rs. 3,50,000 | Rs. 2,500 |
Conclusion
Section 87A plays a crucial role in reducing tax liability for individuals within the specified income limits. This provision ensures that those with lower earnings are not overburdened with taxation. Over the years, the rebate has been revised, expanding benefits to more taxpayers under the new tax regime. Taxpayers should assess their eligibility and claim the rebate while filing their returns to optimize tax savings.
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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.
