Despite surpassing the basic exemption threshold, you might still evade paying any income tax, courtesy of Section 87A of the Income-tax Act, 1961. This provision grants Indian residents a tax rebate under both the old and new tax regimes, contingent upon their total income remaining within the prescribed limits.
For the fiscal year 2023-24 (assessment year 2024-25), the threshold stands at Rs 5 lakh under the old tax regime and Rs 7 lakh under the new one. The maximum rebate permissible is Rs 12,500 for the old regime and Rs 25,000 for the new regime.
Mandatory income tax return (ITR) filing is required if your income surpasses the basic exemption limit or if you engage in certain specified transactions. It is crucial to distinguish between paying income tax and filing an ITR; due to the Section 87A rebate, you may not owe any tax, yet filing an ITR remains obligatory.
Eligibility Criteria for Section 87A Tax Rebate
To qualify for the Section 87A tax rebate, certain conditions must be met:
- You must be an Indian resident individual.
- Under the old tax regime, your total income after eligible deductions (such as those under Section 80C, 80D, etc.) must not exceed Rs 5 lakh.
- Under the new tax regime, your total income after claiming deductions under Section 80CCD (2) must not exceed Rs 7 lakh.
“This tax rebate is unavailable to NRIs and applies solely to the total income tax payable before including the 4% health and education cess. Additionally, the rebate is applicable only on incomes taxed at normal slab rates; special rate incomes do not qualify,” explains Sujit Bangar, a former IRS officer and founder of TaxBuddy.com.
Incomes Excluded from Section 87A Rebate
Certain incomes are not eligible for the Section 87A rebate, notably:
- Long-Term Capital Gains (LTCG): While LTCG from capital assets like land may qualify, those from the sale of listed equity shares or equity-oriented mutual funds do not.
- Short-Term Capital Gains (STCG): STCG from the sale of listed equity shares or mutual funds qualify, but STCG from other capital assets do not.
- Special Incomes: Earnings from gambling, virtual digital assets, lotteries, game shows, and similar sources, taxed at a flat 30% rate plus cess and surcharge, are not eligible for the rebate.
“Rebates under Section 87A are not applicable to income tax payable on LTCG from equity shares or equity-oriented funds where Securities Transaction Tax (STT) has been paid,” notes Ashish Mehta, Partner at Khaitan & Co. However, the rebate can apply to LTCG from unlisted shares and STCG from equity mutual funds.
Practical Examples
Example 1: LTCG on Capital Assets Other Than Equity Shares and Mutual Funds
Consider a property sold for Rs 10 lakh with an indexed acquisition cost of Rs 6 lakh for FY 23-24, resulting in an LTCG of Rs 4 lakh. If no other income is present, the Section 87A rebate applies, irrespective of the chosen tax regime.
Example 2: STCG on Sale of Equity Mutual Funds
For an individual with Rs 6 lakh in STCG from equity mutual funds, taxable at 15%, the new tax regime’s Rs 3 lakh exemption applies. The remaining Rs 3 lakh incurs a 15% tax plus a 4% cess. If the total income is below Rs 7 lakh, a Rs 25,000 rebate is available.
If the income solely consists of STCG, tax is calculated after deducting the basic exemption, and the remaining amount is taxed at 15%,” clarifies Mihir Tanna, Associate Director-Direct Tax at S.K Patodia LLP.
Importance of Accurate Rebate Claims
Exceeding the income limit voids eligibility for the Section 87A rebate. Bangar recounts a client receiving a tax notice for an incorrect rebate claim, as his total income, including LTCG from equity mutual funds, surpassed the Rs 5 lakh limit under the old regime. Consequently, he faced additional taxes, penalties, and interest.
“Section 87A is widely utilized, but one must exercise caution,” advises Bangar. “This incident underscores the complexity of tax rebates and the necessity for careful assessment and expert advice to avoid pitfalls and penalties from incorrect claims.”