Income Tax rebate under section 87A & how it optimize your financial planning

What is Section 87A?

Resident individuals get benefited with tax rebate under Section 87A of the Income Tax Act. This rebate is essentially a reduction in the income tax payable, subject to certain conditions. It's designed to offer relief to taxpayers with lower income levels, effectively reducing their tax burden. Think of it as a helping hand from the government, making tax payment a little less daunting.

Eligibility for Section 87A Rebate:

The Section 87A rebate isn't universally applicable. It has a certain criteria that must be met to get rebate under this section which are discussed below:

• Residential Status: The individual claiming the rebate must be a resident of India. Non-residents are not eligible.
• Individual Taxpayer: The rebate is available only to individual taxpayers. It cannot be claimed by companies, partnerships, or other entities.
• Income Limit: This is the most crucial factor. The net taxable income of the individual, after considering all eligible deductions under various sections of the Income Tax Act (like Section 80C, 80D, etc.), must not exceed a specified limit. This limit ranges from Rs.7 lakh in the new Tax regime and Rs.5 lakh in the old tax regime. Your taxes will be exempted if your income falls under this bracket.

How Section 87A Works:

The Section 87A rebate works by reducing the income tax payable. The rebate amount is the lower of these two values:

• The calculated tax liability on your net income.
• The maximum rebate amount specified under Section 87A i.e. Rs.25000 if your income is up to Rs.7 lakh and you're following a new tax regime or Rs.12500 if your income is up to Rs.5 lakh and you're shifting out of the new tax regime.

This means the rebate can effectively reduce your tax liability to zero if your initial tax liability is less than or equal to the maximum rebate amount. If your initial tax liability is higher than the maximum rebate amount, the rebate will reduce your tax liability by the maximum rebate amount.

Key Points to Remember about Section 87A:

• It's important to understand that Section 87A provides a rebate, not an exemption. This means it reduces the tax liability, not the taxable income itself.
• The income limit for Section 87A and the maximum rebate amount can be revised by the government in the annual budget.
• Section 87A is applicable to both the old and new tax regimes. However, it is important to compare how the rebate works in conjunction with the tax slabs in each regime to determine which regime is more beneficial for you.
• The Section 87A rebate is automatically applied when you file your income tax return.
• The Section 87A rebate is available only to resident individuals.
• It reduces income tax before the 4% health and education cess is added.
• Senior citizens aged between 60-80 years can benefit from this tax rebate under section 87A

Section 87A and Tax Planning:

Section 87A plays a significant role in planning your taxes, especially for individuals with income close to the specified limit. BBy effectively utilizing deductions under other sections of the Income Tax Act, you can bring your net taxable income within the range specified by Section 87A and avail the full rebate, that will reduce your tax liability to zero.

Conclusion:

Section 87A is a valuable provision for resident individuals with lower income levels. Hence a deeper understanding of its eligibility criteria and how it works can help you minimize your tax liability and make the most of your hard-earned money.