Introduction to Income Tax Rebate

The income tax rebate under Section 87A is a significant provision for resident taxpayers in India, allowing those with lower income levels to enjoy substantial tax relief. This rebate is aimed specifically at individuals who earn below a certain income threshold, ensuring that the tax burden is eased for the economically weaker sections of society.

Overview of Section 87A

Section 87A of the Income Tax Act, 1961, provides a rebate to resident individuals whose income does not exceed specified limits. For the financial year 2024-25, the rebate is set at Rs. 25,000 for individuals earning up to Rs. 7 lakhs under the new tax regime. Meanwhile, those under the old regime can claim a rebate of Rs. 12,500 if their income is within Rs. 5 lakhs. The upcoming financial year, 2025-26, sees an increase, with a rebate of Rs. 60,000 for incomes up to Rs. 12 lakhs under the new regime. For a detailed understanding of the tax slabs, refer to our article on income tax slabs for FY 2024-25 and FY 2025-26.

Eligibility Criteria for Claiming Rebate

To qualify for the rebate under Section 87A, individuals must meet the following criteria:

• Must be a resident individual.
• Total income should not exceed Rs. 7 lakhs under the new tax regime or Rs. 5 lakhs under the old regime.

It's important to note that the rebate cannot exceed the total amount of income tax payable before the addition of cess, and it cannot be applied against long-term capital gains tax.

Understanding Rebate Amounts

New Tax Regime

In the current financial year, if an individual's taxable income is up to Rs. 7 lakhs, they can avail a rebate of Rs. 25,000. For the financial year 2025-26, this limit is raised to Rs. 12 lakhs with a rebate of Rs. 60,000 available.

Old Tax Regime

For individuals earning below Rs. 5 lakhs, a rebate of up to Rs. 12,500 can be claimed. Again, the rebate cap is contingent upon the total tax liability before cess.

Marginal Relief Explained

What is Marginal Relief?

Marginal relief refers to the benefit that taxpayers receive when their income slightly exceeds the threshold for tax rebates, meaning that they do not face a disproportionate increase in tax as they surpass the income limit. For instance, if a taxpayer's income marginally exceeds Rs. 7 lakhs, they may still benefit from a reduced tax liability.

Calculation of Marginal Relief

To calculate marginal relief, follow these steps:

1. Determine the income exceeding Rs. 7 lakhs.
2. Calculate the total income tax liability based on the income.
3. If the tax liability exceeds the excess income, the rebate under Section 87A is the difference between the tax liability and the excess income.

Example Calculation

Take Mr. Ravi, for example. His income is Rs. 7.15 lakhs:

• Excess income above Rs. 7 lakhs: Rs. 15,000
• Tax on total income (before cess): Rs. 21,500
• Rebate under Section 87A: Rs. 6,500 (Rs. 21,500 - Rs. 15,000)

How to Claim the Income Tax Rebate for FY 2024-25

Claiming the rebate is a straightforward process:

1. Calculate your gross total income for the financial year.
2. Deduct any eligible tax-saving investments or deductions.
3. Declare your gross income and deductions in your Income Tax Return (ITR).
4. If your total income falls within the specified limits, the rebate is automatically calculated when filing your ITR.

Conclusion

Understanding the provisions of Section 87A is crucial for individuals looking to optimize their tax liabilities. With the rising income thresholds for tax rebates, it is more imperative than ever for taxpayers to stay informed and take advantage of these benefits. By doing so, they can ensure that they retain more of their hard-earned money, contributing positively to their financial health.