Income Tax Rebate: For Income Upto ₹ 5 Lakh Under Section 87A
The government hasn’t changed the basic exemption limit of 2.50 lakh in a long time because it doesn’t want people to fall outside the tax net and avoid filing ITRs. At the same time, successive governments have proposed tax rebates for taxpayers earning up to a certain level of income. Those whose annual income does not exceed 5 lakh are already eligible for a tax refund. Section 87A provides for this refund. Let’s talk about how you use it.
What exactly is the provision of section 87A?
Section 87A was first adopted in the Finance Act of 2003, and it has since been amended several times. If your income does not exceed Rs. 5 lakh, an individual tax payer who is a resident of India for income tax purposes is currently entitled to a tax refund of up to Rs. 12,500 against his tax liability. However, if your income reaches this limit, you lose the right to seek the rebate under Section 87A.
This rebate is not available to everyone. Though the basic exemption cap of Rs. 2.50 lakh applies to all individuals and HUFs, whether resident or non-resident, the Section 87A rebate is only available to individuals, and only if they are residents for income tax purposes. As a result, all HUFs and non-resident persons are ineligible for the rebate.
Which sources of income are to be considered when determining eligibility?
The question of which income is to be considered for the purpose of being eligible for this rebate has always been a source of consternation for taxpayers. It’s the amount of money you earn that determines the final tax liability.
To begin, the income to be considered for this reason is the income obtained after deducting all of the previous year’s losses from the current year’s income. Similarly, you must subtract all available deductions under various sections of Chapter VIA from your net income after certain set-off of losses. Section 80C (for LIP, EPF, PPF, ELSS, tuition fee, home loan repayment, etc. ), Section 80 CCD (NPS), Section 80 D (Health Insurance), 80 G (donations), and 80 TTA and 80TTB (Bank interest) etc.
Rebate applied to which tax liability and cannot be applied to which tax liability?
It is not true that the Section 87A rebate of up to Rs. 12,500 can be applied to any form of tax liability. This rebate can be applied to your tax liability for regular income taxable at the slab rate, as well as long-term capital gains taxed under Section 112. (Section 112 refers to long-term capital gains on the selling of capital assets other than listed equity shares and equity-oriented mutual fund schemes.) This rebate is also applicable against your tax liability for short-term capital gains on listed equity shares and equity-oriented mutual fund schemes, which are taxed at a flat rate of 15% under Section 111A.
Please note that you would not be able to deduct your tax liability for long-term capital gains resulting from the selling of listed equity securities or equity-oriented mutual fund schemes, which is payable 10% after the initial exemption of Rs. 1 lakh, under Section 112A.
How does the rebate work?
People have the misconception that if their income does not surpass the magic number of 5 lakh, they are not required to pay any tax. This is because the tax rate for ordinary income is 5% between 2.50 lakhs and 5 lakhs, and the tax liability at 5% on 2.50 lakhs is exactly 12,500. If your income includes items that are taxed at a higher rate of 15% (short-term capital gains) or 20% (other long-term capital gains), you would always have to pay some tax, even if your total income does not exceed five lakhs.
Your 5-lakh income is made up of one lakh in short-term capital gains on listed shares and the rest is your regular income. Your tax liability will be Rs. 22,500, which will be made up of Rs. 7,500 (5% on 1.50 lakh) plus Rs. 15,000 (15 percent on 1 lakhs of Short term capital gain). Even if your income does not surpass the mark of five lakhs, you would have to pay Rs. 10,000/- and cess after the rebate of 12500/-
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