The Indian Income Tax system has seen significant changes in recent years, with the introduction of the new tax regime. One of the key features aimed at providing relief to taxpayers is the Rebate U/S 87A. This blog will delve into the details of the Rebate U/S 87A under the new tax regime, its implications, and how it benefits taxpayers. We will also illustrate this with an example of a salaried individual named Faiz, who has an income of ₹709,002, and calculate the tax he needs to pay under the new tax regime.
What is Rebate U/S 87A?
Rebate U/S 87A is a provision in the Indian Income Tax Act that allows for a tax rebate for individuals earning up to a certain threshold. This rebate is aimed at reducing the tax burden on individuals in the lower income brackets. Under the new tax regime, introduced in Budget 2020, the rebate continues to be an essential tool for providing tax relief.
Under the old tax regime, taxpayers could claim deductions and exemptions like HRA, LTA, and Section 80C deductions, among others. However, the new tax regime offers lower tax rates but does not allow for most deductions and exemptions. Despite this, the Rebate U/S 87A under the new tax regime continues to be available to taxpayers, thus providing a significant benefit.
Eligibility for Rebate U/S 87A under the New Tax Regime:
To be eligible for the Rebate U/S 87A under the new tax regime, certain conditions must be met:
- Residential Status: The taxpayer must be a resident individual. Non-resident individuals are not eligible for this rebate.
- Income Limit: The total income, after claiming all applicable deductions but before claiming the rebate, should not exceed ₹5,00,000. If the income exceeds this limit, the rebate cannot be availed.
- Taxable Income: The rebate is calculated on the total taxable income after considering the basic exemption limit and other eligible deductions.
The maximum amount of rebate available under Section 87A is ₹12,500. This means that if your total tax liability is ₹12,500 or less, you can claim the entire amount as a rebate, resulting in zero tax liability. If the tax liability exceeds ₹12,500, the rebate will be restricted to ₹12,500..
Calculating Tax Liability with Rebate U/S 87A under the New Tax Regime:
To understand the application of Rebate U/S 87A under the new tax regime, let’s consider the example of Faiz, a salaried individual with an annual income of ₹709,002.
Step-by-Step Calculation:
Total Income: Faiz’s total annual income is ₹709,002.
Deductions: Under the new tax regime, Faiz cannot claim any deductions like Section 80C, 80D, etc.
Tax Calculation: The income tax slabs under the new tax regime for individuals below 60 years are as follows:
- Up to ₹2,50,000: No tax
- ₹2,50,001 to ₹5,00,000: 5%
- ₹5,00,001 to ₹7,50,000: 10%
- ₹7,50,001 to ₹10,00,000: 15%
- ₹10,00,001 to ₹12,50,000: 20%
- ₹12,50,001 to ₹15,00,000: 25%
- Above ₹15,00,000: 30%
Let’s break down the calculation:
- Income up to ₹2,50,000: No tax
- Income from ₹2,50,001 to ₹5,00,000: 5% of ₹2,50,000 = ₹12,500
- Income from ₹5,00,001 to ₹7,09,002: 10% of ₹2,09,002 = ₹20,900.2
Total tax before rebate: ₹12,500 + ₹20,900.2 = ₹33,400.2
Rebate U/S 87A: Since Faiz’s total income is ₹709,002, which is above the threshold of ₹5,00,000, he is not eligible for the rebate U/S 87A under the new tax regime.
Final Tax Liability: Faiz’s final tax liability remains ₹33,400.2.
Benefits and Limitations of Rebate U/S 87A under the New Tax Regime:
Benefits:
- Reduction in Tax Burden: For individuals with an income up to ₹5,00,000, the Rebate U/S 87A under the new tax regime can effectively reduce the tax burden to zero.
- Simplified Tax Structure: The new tax regime, combined with the rebate, simplifies the tax calculation process for individuals.
Limitations:
- Income Threshold: The benefit of the rebate is limited to individuals with an income of up to ₹5,00,000. Those earning above this threshold do not receive any rebate.
- Exclusion of Non-Residents: Non-resident individuals are not eligible for the rebate, which limits its applicability.
Comparing Old and New Tax Regime
While the Rebate U/S 87A is available under both the old and new tax regimes, the choice between the two regimes depends on an individual’s financial situation. The old tax regime allows for various deductions and exemptions, which can significantly reduce taxable income. In contrast, the new tax regime offers lower tax rates but does not allow for most deductions and exemptions.
For example, if Faiz had opted for the old tax regime, he could have potentially reduced his taxable income through various deductions, which might have made him eligible for the Rebate U/S 87A. However, under the new tax regime, with his income being ₹709,002, he does not qualify for the rebate.
Conclusion:
The Rebate U/S 87A under the new tax regime is a crucial component of the Indian Income Tax system, designed to provide relief to taxpayers with lower incomes. By understanding the eligibility criteria and the calculation process, taxpayers can make informed decisions about their tax planning. For individuals like Faiz, whose income exceeds the threshold, the rebate may not apply, but the simplified tax structure of the new regime can still offer benefits. As tax laws continue to evolve, staying informed and adapting to changes is essential for effective financial planning.
Understanding the nuances of Rebate U/S 87A under the new tax regime can help taxpayers maximize their benefits and ensure compliance with the tax regulations. Whether to opt for the old or new tax regime is a decision that should be made after careful consideration of one’s financial situation and long-term goals.
Very nice… Thank you for providing details on tax regimes