The Budget 2023 has revised the threshold limit of tax rebate u/s 87A for the new tax regime. Before we get into discussing about how Section 87A rebate is calculated, lets first see How much rebate can be claimed under Section 87A?
As per the latest 2023 rules of tax rebates in India:
- A income tax rebate under section 87 of Rs 25,000 is available u/s 87A for the NEW tax regime for individuals whose taxable income is Rs 7 lakh or less in a year.
- A rebate of Rs 12,500 is available u/s 87A for those under the OLD tax regime for individuals whose taxable income is Rs 5 lakh or less in a year.
Therefore, the Section 87A Tax rebate is available under both new and old tax regimes for FY2023-24.
So you can claim Sec 87A Rebate of Rs 25,000 under the new tax regime and Rs 12,500 under the old tax regimes. But you can claim these only if you earn less than Rs 7 lakh (under new tax system) or Rs 5 lakh (under old tax system).
How is Section 87a Rebate calculated?
Let’s take a few examples of how the Section 87A Rebate will make income of Rs 7 lakh tax-free under the new tax regime. As a reminder of the new tax slab rates:
- Between Rs 0 to Rs 3 lakh – 0% tax rate
- Between Rs 3 to 6 lakh – 5%
- Between Rs 6 to 9 lakh – 10%
- Between Rs 9 lakh to Rs 12 lakh – 15%
- Between Rs 12 lakh to Rs 15 lakh – 20%
- Above Rs 15 lakh above – 30%
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Example 1: Total annual income is Rs 2.5 lakh
Since the annual income falls in the first slab of Rs 0-3 lakh which is taxed at 0%, there is no tax to be paid anyways.
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Example 2: Total annual income is Rs 5 lakh
The tax for this is calculated as follows:
– Income Rs 0 to Rs 3 lakh = Rs 3 lakh is taxed at 0% = Tax is Rs 0
– Income Rs 3 to Rs 5 lakh = Rs 2 lakh is taxed at 5% = Tax is Rs 10,000
Total tax is 0 + Rs 10,000 = Rs 10,000
Here the taxpayer will get a rebate of full Rs 10,000 under Section 87A (with upper limit of Rs 25,000 under new tax regime).
So the total tax to be paid is Nil
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Example 3: Total annual income is Rs 7 lakh
The tax for this is calculated as follows:
– Income Rs 0 to Rs 3 lakh = Rs 3 lakh is taxed at 0% = Tax is Rs 0
– Income Rs 3 to Rs 6 lakh = Rs 3 lakh is taxed at 5% = Tax is Rs 15,000
– Income Rs 6 to Rs 7 lakh = Rs 1 lakh is taxed at 10% = Tax is Rs 10,000
Total tax is 0 + Rs 15,000 + R 10,000 = Rs 25,000
Here also the taxpayer will get a rebate of full Rs 25,000 under Section 87A (as the upper limit for rebate here is Rs 25,000 under new tax regime).
So, once again the total tax to be paid is Nil.
Now let’s see what happens if a person earns slightly more than Rs 7 lakh – which is the limit for Section 87A.
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Example 4: Total annual income is Rs 7.1 lakh (Rs 7,10,000)
This is a peculiar case. If we go by the above rule, then suddenly the tax liability will increase. Let’s see. This is how the tax for this is calculated as per the above rules:
– Income Rs 0 to Rs 3 lakh = Rs 3 lakh is taxed at 0% = Tax is Rs 0
– Income Rs 3 to Rs 6 lakh = Rs 3 lakh is taxed at 5% = Tax is Rs 15,000
– Income Rs 6 to Rs 7.1 lakh = Rs 1.1 lakh is taxed at 10% = Tax is Rs 11,000
Total tax is 0 + Rs 15,000 + R 11,000 = Rs 26,000
Since the taxpayer in this example earns more than Rs 7 lakh, he was not eligible for a rebate under Section 87A. So even though his income is just slightly above the Rs 7 lakh limit, he will still have to pay the full tax calculated (Rs 26,000) as he is not eligible to get a rebate under Section 87A for the new tax regime).
To correct this anomaly, the new tax regime has been amended in March 2023. Now if the net taxable income is above Rs 7 lakh and if the calculated income tax is greater than taxable income minus Rs 7 lakh (=Taxable Income – Rs 7 lakh), then the tax to be paid is = taxable income minus Rs 7 lakh.
This new benefit is applicable to the taxable income of up to Rs 7.27 lakh. After that, taxable income minus Rs seven lakh will become greater than the tax.
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To summarize, if your taxable income is less than Rs 7 Lakh*, then under the new tax regime, your tax liability would be NIL and you can avail the zero tax benefit using the Section 87A rebate in FY2023-24.
* You can even be earning Rs 7.5 lakh and use the standard deduction of Rs 50,000 to reduce taxable income to Rs 7 lakh to become eligible for Section 87A rebate for FY2023-23.
You can read another detailed post I wrote about How to Pay no tax for Rs 7 lakh income? And if you are still opting to remain under the old tax regime, then only Rs 5 lakh income is tax free under old tax system.
Please note that even if you are earning less than Rs 7 lakh and your tax liability is zero, you should still file income tax returns and have the Section 87A rebate that you used, validated.
Also, remember that Section 87A is available for resident Indian taxpayers only. So if you were to ask if NRIs can claim rebates under section 87A, then the answer is No. Non-Resident Indians or NRIs are not eligible for an income tax rebate under 87A.
The Section 87A rebate is also not available on Long Term Capital Gains (LTCG) from equity investments.
Related Reading – New Vs Old Tax Slabs – Which is Better?
The Rebate under Section 87A helps Indian taxpayers reduce their income tax liability to zero if they earn up to Rs 7 lakh. I hope now you have a fair idea about what is rebate u/s 87A Rs 0 tax, How is Section 87a Rebate calculated, and more importantly, how income of up to Rs 7 lakh can be made tax-free in India (2023).