Tax planning is an essential part of managing personal finances effectively. The Indian government, through the Income Tax Act, provides various rebates and deductions to help individuals lower their tax liability. One such beneficial provision is Section 87A, which offers significant tax relief to resident individuals with lower incomes. In this blog, we’ll dive deep into Section 87A, its evolution, and how you can benefit from it.
What is Section 87A?
Section 87A provides a rebate on income tax to individual taxpayers who meet specific income criteria. This provision was introduced with the Finance Act, 2013, to reduce the tax burden for individuals in the lower income bracket. Over the years, several amendments have been made to Section 87A, increasing the rebate amount and adjusting the eligible income thresholds.
Eligibility for Rebate Under Section 87A
To be eligible for the rebate under Section 87A, you must meet the following conditions:
- Resident Individual: The rebate is available only to resident individuals. Non-residents are not eligible for this rebate.
- Total Income Limit: The total income (after deductions under Chapter VI-A) should not exceed a specific threshold. The current limits are ₹5 lakh under the old tax regime and ₹7 lakh under the new tax regime (as per the provisions of Section 115BAC(1A)).
Evolution of Section 87A
1. Finance Act, 2013 – Initial Insertion
The rebate under Section 87A was introduced through the Finance Act, 2013, effective from Assessment Year 2014-15. The purpose was to provide relief to individuals with lower incomes. Initially, the rebate was:
- Amount of Rebate: Up to ₹2,000.
- Income Threshold: Total income not exceeding ₹5 lakh.
2. Finance Act, 2016 – Increased Rebate
The Finance Act, 2016 increased the rebate amount to ₹5,000 for individuals with total income up to ₹5 lakh. This was a substantial relief for lower-income taxpayers, providing them with a higher deduction from their tax liability.
3. Finance Act, 2017 – Rationalization of Rebate
In the Finance Act, 2017, the rebate under Section 87A was reduced to ₹2,500, applicable only for resident individuals whose total income did not exceed ₹3.5 lakh. This amendment applied from Assessment Year 2018-19.
4. Finance Act, 2019 – Major Relief for Middle-Income Taxpayers
A significant change came with the Finance Act, 2019, which raised the income threshold back to ₹5 lakh and increased the rebate to ₹12,500. This meant that individuals with total income up to ₹5 lakh would have no tax liability after claiming the rebate. This change applied from Assessment Year 2020-21 and has been a significant relief for middle-income taxpayers.
5. Finance Act, 2023 – Special Provisions for the New Tax Regime
The Finance Act, 2023 introduced special provisions under Section 115BAC(1A), effective from Assessment Year 2024-25. Under this, individuals opting for the new tax regime are entitled to a full rebate on income tax if their total income is up to ₹7 lakh. For those earning slightly more than ₹7 lakh, a marginal relief is available to reduce the tax burden. Here’s how it works:
- Income up to ₹7 lakh: The individual is eligible for a full rebate, effectively paying no tax.
- Income above ₹7 lakh: A marginal relief ensures that the tax payable is limited to the amount by which the income exceeds ₹7 lakh.
Current Rebate Structure
Here’s a breakdown of the current rebate structure under Section 87A:
| Regime | Total Income Limit | Maximum Rebate | Effective Tax |
|---|---|---|---|
| Old Tax Regime | Up to ₹5 lakh | ₹12,500 | ₹0 |
| New Tax Regime | Up to ₹7 lakh | ₹25,000 | ₹0 |
| New Tax Regime (above ₹7 lakh) | Marginal relief available to cap the tax payable to the excess over ₹7 lakh |
How Does Marginal Relief Work?
Marginal relief is a special provision that ensures taxpayers whose income slightly exceeds ₹7 lakh do not face a disproportionately high tax liability. Here’s an example:
- Example 1: If an individual’s total income is ₹7.20 lakh, the tax payable under the new regime would be ₹27,000. However, since the excess income over ₹7 lakh is only ₹20,000, the individual would receive a marginal relief of ₹7,000, reducing the tax liability to ₹20,000.
- Example 2: If the total income is ₹7.35 lakh, the tax payable would be ₹28,500. In this case, since the excess over ₹7 lakh is ₹35,000, and the total tax liability exceeds ₹25,000, no marginal relief would be applicable.
This ensures fairness by preventing a sudden spike in tax liability for individuals just above the rebate threshold.
Section 87A and the New Tax Regime: Key Takeaways
- No Tax for Incomes up to ₹7 Lakh: Under the new tax regime (Section 115BAC(1A)), if your total income is up to ₹7 lakh, you can effectively pay zero tax.
- Marginal Relief: If your income slightly exceeds ₹7 lakh, you will get a marginal rebate to ensure a fair tax computation.
- Advance Tax Payment: Despite the rebate, taxpayers whose income exceeds ₹2.5 lakh must still comply with the provisions related to advance tax payments.
FAQs on Section 87A
1. Can non-resident individuals claim the rebate under Section 87A?
No, only resident individuals in India are eligible for the rebate under Section 87A.
2. What is the maximum income limit for claiming the rebate under Section 87A in the old tax regime?
The maximum income limit is ₹5 lakh. If your total income (after deductions) does not exceed ₹5 lakh, you can claim the rebate.
3. How does Section 87A apply under the new tax regime?
Under the new tax regime (Section 115BAC(1A)), individuals with total income up to ₹7 lakh can claim a rebate, making their effective tax liability zero. For incomes slightly exceeding ₹7 lakh, marginal relief is available.
4. Is advance tax applicable even if I am eligible for the rebate under Section 87A?
Yes, advance tax provisions apply based on your total income. You must calculate and pay advance tax even if you are eligible for the rebate.
5. Does the rebate under Section 87A apply to Hindu Undivided Families (HUFs)?
No, the rebate is only available to resident individuals and not to HUFs or other entities.
Conclusion
Section 87A is a crucial tax-saving tool for individuals in the lower and middle-income groups. By taking advantage of this rebate, eligible taxpayers can significantly reduce their tax liability, or even eliminate it entirely. With the recent changes under the Finance Act, 2023, the rebate has been extended to those opting for the new tax regime with incomes up to ₹7 lakh, providing further relief.
Proper tax planning, understanding your eligibility, and knowing the right regime to choose can help you maximize your tax savings under Section 87A.
Stay informed, plan wisely, and make the most of the rebates available to you!
