All about Income tax rebate under Section 87A

Section 87A of the Income Tax Act 1961 provides a tax rebate for Indian citizens whose total annual income does not exceed Rs 5 lakh after Chapter VIA of Section 80C deductions. Inserted in Finance Act, 2003, this income tax rebate can be enjoyed by individuals and not by other entities such as Hindu undivided families (HUF), an association of persons (AoP), a company, or a firm. Knowing about this IT exemption will help you understand your tax liability to the government.

A rebate in Income tax is a specific amount realized as a refund upon the payment of the tax every financial year. Under several sections of the Income Tax Act, 1961, different rebates are provided to Indian taxpayers with low income. One such benefit that can be availed of is under Section 87A. Read on to know about the eligibility criteria and find out how it is useful for young aspiring homebuyers.

What is Section 87A?

In order to reduce the Income tax burden on individual taxpayers in the lower salary range, the Central government introduced rebates under Section 87A of the Income Tax Act, 1961. As per Union Budget tabled in 2019, the government hiked the net taxable income for getting the rebate to Rs 5 lakh and the maximum amount to Rs 12,500.

Tax rebate under Section 87A

To understand the tax rebate, consider this example:

If the gross income of an individual is Rs 6.5 lakh in FY 2022-23 and the deduction allowed under Section 80C is Rs 1.5 lakh, then the total annual income is Rs (6.5 lakh – 1.5 lakh) = Rs 5 lakh.

The Income tax on Rs 5 lakh @5 percent is Rs 12,500.

This implies that the tax rebate under Section 87A is Rs 12,500.

Hence, the individual will not have to pay tax in that financial year.

Who is eligible for rebate under Section 87A?

Here is the list of eligibility criteria for Section 87A:

  • A Hindu undivided family (HUF) cannot claim this tax benefit. It has to be an individual taxpayer
  • One has to be a permanent resident of India. Non-resident Indians (NRIs) cannot avail of tax rebates under this section
  • Senior citizens aged between 60 and 80 years can claim the tax rebate under Section 87A. However, senior citizens of age above 80 years are not eligible for such claims
  • It is only applicable after the calculation of the IT liability of an individual. After the calculation of tax deduction under Section 80C to 80T as a part of Chapter VI and balancing any previous loss in the individual’s income, this section is applied

Also, Section 87A defines the type of income that can claim tax benefits. They are:

  • Regular income
  • Long-term capital realised from equity-oriented schemes of mutual funds capital assets and by selling capital assets. It is not applicable for listed equity shares
  • Short-term gain on capital made by selling listed equity shares and equity-oriented mutual fund schemes

How is it useful for aspiring homebuyers?

Aspiring homebuyers can use this section to enjoy tax benefits. Even after reducing the gross taxable annual income by using Section 80C to 80T, they can use a home loan as per Section 24B for tax exemption.

Section 87A can be used after a taxpayer’s IT liability is calculated. By applying this section, a taxpayer can get a tax rebate and enjoy the benefits of home loan interest in a better way.

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