Even if your income exceeds the basic exemption limit, you may not have to pay any income tax. This is due to section 87A of the Income-tax Act, 1961, which allows Indian residents to claim a tax rebate under both the old and new tax regimes. However, this rebate is only applicable if your total income remains below the specified threshold limit.
For FY 2023-24 (AY 2024-25) the threshold is Rs 5 lakh under the old tax regime and Rs 7 lakh under the new tax regime. Under the old tax regime, the maximum tax rebate allowed is Rs 12,500 and for the new tax regime, it is up to Rs 25,000.
Filing of income tax return (ITR) is mandatory if your income is above the basic exemption limit or if you have conducted certain specified transactions. You must note that paying income tax and filing ITR are two different things. Due to section 87A tax rebate, you are not required to pay income tax, but you still must file ITR.
When are you eligible to claim tax rebate under section 87A?
An individual needs to satisfy certain conditions to become eligible for claiming section 87A tax rebate. As per income tax laws, here are the conditions:
- Indian resident individual, and
- The total income after claiming eligible deductions under section 80C, 80D, etc does not exceed Rs 5 lakh (old tax regime) or
- The total income after claiming deduction under section 80CCD (2) does not exceed Rs 7 lakh (under new tax regime).
“This tax rebate is not applicable to NRIs and can be applied to the total income tax payable before including health and education cess of 4%. Moreover, the rebate is available only on incomes which are taxed at normal slab rates applicable to an individual. For incomes which are taxed at special rates, no income tax rebate under section 87A is available,” says Sujit Bangar, former IRS officer and founder of TaxBuddy.com
Which incomes are not eligible for income tax rebate under section 87A
NRIs, not ordinarily resident individuals and Hindu Undivided Families (HUFs) are not eligible for tax rebate under section 87A. Moreover, this rebate is not available for incomes that are taxed at special rates. These include:
- Long-Term Capital Gains (LTCG): LTCG from capital assets (like land, etc) are eligible for section 87A rebate. However, LTCG from sale of listed equity shares or equity-oriented mutual funds are not eligible for tax rebate under section 87A.
- Short-Term Capital Gains (STCG): STCG from the sale of listed equity shares or equity mutual funds are eligible for rebate under section 87A. However, STCG from other capital assets (like land, etc) are not eligible for tax rebate under section 87A.
- Special incomes: Certain incomes which are taxed at specific rates instead of income tax slabs like winnings from gambling, virtual digital assets (VDA), online gaming, lotteries, game shows or betting, etc. These are not eligible for tax rebate under Section 87A. These incomes are usually taxed at a flat rate of 30% along with cess and surcharge (if applicable).
“Section 87A rebate is not available on income tax payable on long term capital gains (LTCG) arising on transfer/sell of equity shares (where Securities Transaction Tax (STT) has been paid on acquisition and transfer of such share) and/or unit of an equity-oriented fund or a unit of a business trust where STT has been paid on transfer/sale of such units. However, this tax rebate is available against LTCG arising on sale of land, unlisted shares and on STCG on sale of equity mutual funds or equity shares,” says Ashish Mehta, Partner, Khaitan & Co, a law firm.
Fellow Chartered accountant (FCA) Ashish Niraj explains the concept with an example where a property has been sold and indexation benefits have been given:
Example 1: LTCG on capital assets other than equity shares and mutual funds like land, property etc
Suppose a person sells a property for Rs 10 lakh and the indexed cost of acquisition of that property for FY 23-24 is Rs 6 lakh. In that case, under section 112 there will be LTCG of Rs 4 lakh. Assuming that person does not have any other income, then section 87A rebate will be applicable to him irrespective of the tax regime selected.
Chartered accountant Mihir Tanna, associate director-direct tax, S.K Patodia LLP explains the concept with an example of STCG on sale of equity mutual funds.
Example 2: Short Term Capital Gains on sale of equity mutual funds
If an individual has short-term capital gain (STCG) from the sale of equity mutual funds, then it is taxable at 15%. In this example, we take the individual’s STCG as Rs 6 lakh and assume that he/she selected the new tax regime.
In the new tax regime, Rs 3 lakh is the basic exemption limit. So, it will be available for the STCG and on balance Rs 3 lakh 15% tax liability will be levied which is Rs 45000 + cess at 4% rate (Rs 3 lakh*15%). However, as the income is below Rs 7 lakh, a tax rebate of Rs 25,000 is available.
“If he/she earns only STCG income, then the income tax liability will be calculated after reducing the basic exemption limit from STCG and then on the balance amount, income tax at 15% rate is to be calculated,” says Tanna.
In case the total income exceeds the limit, you will no longer be eligible for section 87A rebate. Bangar shares a case study of one of his clients who got a tax notice due to incorrectly claiming section 87A benefits. He says, “One of our clients who is a resident Indian, recently faced a tax notice for incorrectly claiming section 87A tax rebate. His total income included LTCG from equity mutual funds. The notice from the department highlighted the fact that his income exceeded the Rs 5 lakh limit applicable for claiming section 87A rebate under the old tax regime. Consequently, he had to pay additional taxes, along with penalties and interest.”
While section 87A rebate is one of the most widely used rebate(s), however, one needs to be careful while using it. “This experience serves as a cautionary tale about the complexities of tax rebates and the specific exclusions under section 87A. Taxpayers should carefully assess their income sources and seek expert guidance to avoid potential pitfalls and penalties associated with incorrect rebate claims,” says Bangar.