What is Tax Rebate?
A tax rebate is a refund of excess tax paid by an individual or a business. When you pay more than your tax liability, you get a refund on the amount paid. The government also gives back any money it owes you.
The excess money is refunded at the end of the fiscal year. To claim a tax rebate, one needs to file a tax return.
Important information about tax rebate
Section 87A of the Income Tax Act provides for a rebate of up to ₹12,500 for the financial year 2020-21. The maximum limit of tax rebate under Section 87A was increased from ₹5,000 to ₹12,500 in the Union Budget 2019-20.
Income tax is levied on all individuals and entities as per the income tax slab. However, there are certain cases where you can claim a rebate under Section 87A of the Income Tax Act.
You can claim a maximum rebate of up to ₹12,500 under Section 87A for the financial year 2020-21 if your net taxable income is below ₹5 lakhs. If your net taxable income is above ₹5 lakhs but less than ₹10 lakhs, then you can claim a maximum rebate of ₹2 Lakhs under Section 87A. You cannot claim any deduction or credit under this section if your net taxable income exceeds ₹10 lakhs.
Here is the table showing the Maximum Tax Rebate Allowed under Section 87A for various Financial Years:
|Financial Year||Limit on Total Taxable Income (₹)||Amount of rebate allowed u/s 87A (₹)|
Eligibility to claim tax rebate
To claim a deduction under Section 87A, you must meet all of the following conditions:
- You are a resident individual.
- Your gross total income exceeds ₹2,50,000 but not by more than ₹5 lakhs (for FY 2019-20).
- The sum of your total income and total deductions allowed under Sections 80C, 80CCG and 80DD exceed ₹1 lakh (for FY 2019-20).
- You have not claimed any deductions under Section 80TTA or Section 80TTB or any other section applicable to senior citizens or super senior citizens (for FY 2019-20).
How to claim tax rebate
The Income Tax Act, 1961, provides for a rebate of ₹12,500 on your tax liability.
The amount of this rebate is to be claimed under section 87A. You may claim this rebate if your gross total income for the previous financial year is less than ₹5 lakhs and you have made investments in certain specified instruments.
To claim this rebate –
- First, compute your gross total income in the previous financial year.
- Then, subtract all the tax deductions that you have claimed for tax saving investments from this figure; this will give you your Gross Total Income after tax deductions.
- Next, estimate your gross tax liability on the Gross Total Income but do not add cess to the amount; this will give you an idea of how much tax you would owe if no deduction were allowed on investments made under sections 80C and 80CCC (1) (a).
- Finally, claim the 87A rebate on your gross tax liability before cess and arrive at your net tax liability.
- In case your total income is below ₹5 lakhs, then this step will bring down your net tax liability to zero.
Examples for better understanding
The Income Tax Act has a provision that allows taxpayers who earn less than Rs.5 lakh p.a. and whose tax liability is less than Rs.12,500 to claim the entire amount of tax they paid as a rebate.
However, this scheme does not apply to all taxpayers. It only applies to individuals who earn less than Rs.5 lakh p.a., and their tax liability must be less than Rs.12,500 for the financial year in question for them to qualify for a rebate under Section 87A of the Income Tax Act.
Let’s take the example of Mr Ajay. Assume he has three different total taxable incomes
- ₹4 lakh
- ₹5 lakh
- ₹6 lakh
Does he qualify for Section 87A rebate on his total income for FY 2022-23?
Let’s understand the entire concept of tax rebate using the table
|Total Taxable Income||4,00,000||5,00,000||6,00,000|
|Less: Basic Exemption Limit||2,50,000||2,50,000||2,50,000|
|Taxable Income after Basic exemption limit||1,50,000||2,50,000||3,50,000|
|Less: Rebate under section 87A
1) Tax Payable or
2) Rs 12,500
|Balance Tax Payable||NIL||NIL||32,500|
|Add: Health & Education Cess @ 4%||–||–||1,300|
|Final Tax payable||–||–||33,800|
From the above table we can easily understand income tax calculation of Mr. Ajay. He will be getting a tax rebate benefit when his total taxable income is ₹4 lakh and ₹5 lakh respectively. His tax liability effectively becomes nil because he qualifies for a rebate under Section 87A of the Income Tax Act, which states that if you earn less than Rs 2 lakh per annum and your tax liability was less than 12500 then you will get a full or partial refund on taxes paid by you.
- When his income was ₹4 lakh, he had a taxable income of a mere ₹7500. He got a rebate as the taxable amount did not exceed ₹12500.
- The same was the case when his total taxable income was ₹5 lakh. After all the deductions, his taxable income stood at ₹12500. Now it becomes interesting because if his taxable income would have exceeded by just ₹1, he would have been taxed.
- In the third scenario, as the taxable income goes beyond ₹12500, it gets taxed, and no rebate is given.
Above example can is a good way to understand the income tax calculation for tax rebates.
Tax rebate is a good provision for getting below the taxable limit. Although it will not be applicable if you’re taxable income exceeds the ₹12500 mark. You can perform any income tax calculation on your own and make necessary investments to avail the benefit of a tax rebate.
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