Rebate Under Section 87A: Updated Rules and Impact on Taxpayers

Overview of Rebate u/s 87A

Rebate under Section 87A of the Income Tax Act provides financial relief to taxpayers whose total income does not exceed a specified limit. Eligible taxpayers can reduce their tax liability up to a maximum specified amount based on their total income.

Important Update: Rebate u/s 87A Disallowed for STCG by CPC

The Income Tax Department updated the Income Tax Return (ITR) utility on 5th July 2024, aligning it with the latest regulations. As per the updated rules, the rebate under Section 87A is no longer available for any special rate incomes, including short-term capital gains (STCG) taxed under Section 111A.

Disallowance of Rebate u/s 87A: Situation and Reason

Situation:

• A taxpayer filed an ITR, including STCG under Section 111A, and claimed a rebate under Section 87A.
• During CPC (Centralized Processing Center) processing, the rebate was disallowed, despite being allowed by the older ITR utility during filing.

Reason for Disallowance:

• Post 5th July 2024, the updated ITR utility does not permit rebates u/s 87A for incomes taxed at special rates, such as STCG under Section 111A.
• Rebates are only applicable to income taxed at normal slab rates.

Impact on Taxpayers

Many taxpayers have faced disallowance of rebates due to the mismatch between the older filing utility and the updated CPC processing system. This highlights the need for taxpayers to stay updated with changes in the ITR utility and tax rules.

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Eligibility for Rebate u/s 87A

Under the Old Tax Regime:

• Taxpayer must be a resident individual.
• Rebate amount: Up to ₹12,500.
• Total income should not exceed ₹5,00,000.

Under the New Tax Regime:

• Taxpayer must be a resident individual.
• Rebate amount: Up to ₹25,000.
• Total income should not exceed ₹7,00,000.

Note: The rebate is calculated on the tax amount before applying the Health and Education Cess of 4%.

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Who Cannot Claim Rebate u/s 87A?

The rebate under Section 87A is not applicable to the following entities:

• Hindu Undivided Families (HUF)
• Firms
• Companies
• Non-resident individuals
• Senior citizens above 80 years of age

For detailed information, refer to the Applicable Income Tax Slabs for FY 2023-24.

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Steps to Claim Rebate u/s 87A

1. Calculate your gross total income for the financial year.
2. Deduct eligible tax-saving investments (e.g., LIC premiums, Section 80C deductions).
3. Compute your total income after applying the deductions.
4. Check if your total income is:
   • ₹7,00,000 or below under the new tax regime.
   • ₹5,00,000 or below under the old tax regime.
5. Claim the rebate:
   • Maximum rebate under the new tax regime: ₹25,000.
   • Maximum rebate under the old tax regime: ₹12,500.

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Example: How to Claim Rebate u/s 87A

Under New Tax Regime:

Under Old Tax Regime:

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Rebate and Capital Gains

Before 5th July 2024:

• Section 87A rebates were allowed for STCG under Section 111A and other special rate incomes.
• Exception: Rebate was not allowed for long-term capital gains (LTCG) under Section 112A.

After 5th July 2024:

• Section 87A rebates are disallowed for all special rate incomes, including STCG under Section 111A.

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Historical Rebate Limits u/s 87A

Conclusion

Section 87A was introduced to provide tax relief to resident individuals, supporting economic well-being and a fairer tax system. With the recent changes, taxpayers must carefully evaluate their eligibility for the rebate and ensure compliance with the latest rules to avoid processing issues.