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Currently, section 87A allows individuals to claim a tax rebate of Rs 12,500 under the old tax regime and Rs 25,000 under the new tax regime. This means that individuals opting for the old tax regime are not required to pay any tax if their taxable income does not exceed Rs 5 lakh. Similarly, if an individual opts for the new tax regime, zero tax is payable on taxable income up to Rs 7 lakh. Note that the deduction under Section 87A is from tax payable and not from the income of the individual.
The taxable income can be reduced to Rs 5 lakh or Rs 7 lakh by using tax exemptions and deductions as available under the old and new tax regimes.
Till March 31, 2023 (FY 2022-23), section 87A tax rebate under old and new tax regime was available for taxable income up to Rs 5 lakh. Hence, opting for old or new tax regime made no difference for an individual having taxable income up to Rs 5 lakh. However, to make the new tax regime more attractive, the tax rebate was hiked to Rs 25,000 for this tax regime only. This made zero tax payable for taxable income up to Rs 7 lakh in the new tax regime for FY 2023-24 (from April 1, 2023).
No change was made in the tax rebate under Section 87A for the old tax regime for the current FY, 2023-24.
It is important to note that even though there is zero tax payable, filing income tax return is mandatory, depending on the rules of the tax regime chosen by the individual. Normally, an individual has to file an ITR when his/her gross taxable income exceeds the basic exemption limit.
The basic exemption limit differs in both tax regimes. For the current financial year (FY 2023-24), the basic exemption limit in the new tax regime is Rs 3 lakh. This limit applies to all individuals opting for the new tax regime irrespective of their age. Hence, if an individual opts for the new tax regime and their gross taxable income exceeds Rs 3 lakh in a financial year, then ITR filing is mandatory.
In the old tax regime, the basic exemption limit applicable to an individual depends on their age. For FY 2023-24, the basic exemption limit for individuals below 60 years is Rs 2.5 lakh. For senior citizens (60 years and above but below 80 years), the basic exemption limit is Rs 3 lakh. For super senior citizens (aged 80 years and above), the basic exemption limit is Rs 5 lakh. So, filing ITR becomes mandatory depending on the age if the individual opts for the old tax regime and has a gross taxable income that exceeds basic exemption limit.
Not all can avail benefit of Section 87A
Not all categories of taxpayers can avail benefit of tax rebate under Section 87A. The benefit is available only to resident individuals. Non-resident individuals (NRIs), Hindu undivided families (HUFs) and firms are not eligible for the tax rebate under Section 87A.How to claim tax rebate under Section 87A
The tax rebate is claimed at the time of filing the income tax return. Depending on the tax regime, tax rebate is considered for the purpose of TDS on salary as well.
If your taxable income is Rs 7.40 lakh, opt for the new tax regime. After standard deduction of Rs 50,000, the net taxable income will be Rs 6.90 lakh. This is below the Rs 7 lakh limit. Your employer will then not deduct any tax on salary income. This is because zero tax is payable under the new tax regime for taxable incomes up to Rs 7 lakh.
To claim the tax rebate while filing ITR (irrespective of the tax regime), follow these steps:
Step 1: Calculate your gross total income from all sources.
Step 2: Deduct all eligible deductions.
The old tax regime has multiple tax related deductions from income and exemptions such as under Section 80C, 80D, standard deduction from salary income, HRA tax exemption, LTA tax exemption, etc. In the new tax regime, an individual is eligible for standard deduction from salary/pension income as well as deduction under Section 80CCD (2) for employer's contribution to the employee's NPS account.
Step 3: After the deductions, one gets the net taxable income. If this does not exceed Rs 7 lakh (new tax regime) or Rs 5 lakh (old tax regime), the final tax payable amount will appear as zero because the ITR filing portal will automatically take tax rebate under Section 87A into account.
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