Section 87A of Income Tax Act provides rebate for Small Tax Payers. The Rebate under section 87A was introduced only a couple of years back. This Rebate is available only to Indian Residents. Section 87A Rebate will not be available to other Assessees like HUF, Companies etc. The Rebate is available to the extent of Rs.5,000. You should also note that the rebate calculation should be made only on Gross Income (Explained below). Another important provision under section 87A is that this rebate is applicable and available to Super Senior Citizens as defined in the Income Tax Act. And, another important rule is that, in order to be eligible for this rebate, your gross total income cannot exceed Rs.5,00,000 (which means the government is clearly targeting the small tax payers only). In our previous article, we have written on Section 194A, Section 89, Section 80TTA and Section 80D of Income tax Act.
Section 87a Introduction
In Budget 2013 Finance Minister Mr. P. Chidambaram choose a middle way to give benefit to small tax payers and save a big amount of tax for tax revenue by neglected bigger slab tax payers. Sec 87A was introduced- A tax rebate which is not so high to affect a lot to revenue and it is only for middle class.
What the FM says about Section 87a
“Nevertheless, I am inclined to give some relief to the tax payers in the first bracket of Rs. 2 Lakh to Rs. 5 Lakh. Assuming an inflation rate of 10% and a notional rise in the threshold exemption from Rs. 2,00,000/- to Rs. 2,20,000/- I propose to provide a tax credit of Rs. 5,000/- to every person who has a total income upto Rs. 5 Lakh”
It is assumed that about 1.8 crore taxpayers will get benefit of this rebate. So a little amount of Rs. 5,000/- per tax payer made a huge revenue loss of approx. 3,600 crore Indian rupees to income tax department.
This section is applicable from 1-4-2014 i.e. it is applicable for A.Y. 2014-15.
Actual Provision of Section 87A
- The section 87A seeks to provide that an tax payer being an individual , whose total Taxable Income does not exceed 5,00,000/-( After deduction of U/s 10, 16, 80C and under chapter VI A). It is must be great opportunity to tax relief for below tax payers.
- This amendment will take effect from 1st April 2013 which effect for the Financial Year 2013-14 and Assessment Year 2014-15.
Amount of Rebate benefit under section 87a
Section 87A provides a tax rebate upto Rs. 5,000/- to individuals who have total income upto 5,00,000/-. The tax slab remained same there is no change in it.
This is only giving a rebate of tax amount which is equal to hundred percent of income tax or 5,000/- whichever is less i.e. minimum tax rebate is the tax amount in normal course and maximum is Rs. 5,000/-.
Thus it will not be deducted from the income, it will be deducted from the tax amount. One point to be noted, education cess and secondary and Higher education cess will be charged after adjusting this rebate.
Salient Features of Rebate u/s 87A
Only individuals can take benefit of this. Individual can be male, female or senior citizen. HUF, Companies, Partnership Firms, LLPs are not allowed to claim this rebate.
Only Resident individuals are eligible.
This rebate is not applicable to Super Senior Citizens i.e. individuals who has attained the age of 80 because their income upto 5,00,000/- is exempt from Income tax and this section doesn’t applicable on above 5,00,000/- total income.
This relief is for all individuals whose total income is not more than 5,00,000/-. This means total income can be 5,00,000/-.
This is applicable from 1-4-2014 it means it is for assessment year 2014-15 or financial year 2013-14.
87A is applicable on total Income not on Gross Income. Gross income means total of income under all five heads i.e. Salary, House Property, Business or Profession, Capital Gains and Income from other sources.
Filing of income tax return is necessary in spite of fact that total income is below exempt limit after this rebate.
Section 87A Reabate Calculation
- First calculate total income by deducted all possible deductions and rebates from Gross total income except sec 87A, it is total income for normal tax rate.
- From this total income liable to tax, calculate tax in normal course which will be 10% slab as it is normal rate for total income upto 5,00,000/-.
- Now deduct total tax or 5,000/- whichever is less from above calculated tax.
- Calculate education cess and secondary and higher education cess on this amount.
- Total of this will be tax payable by individual.
For example: Let’s assume Mr. A is a businessman. In F.Y. 2013-14 Mr. A’s total income is 5,80,000/-. He deposited 30,000/- in Mutual fund, deposited 20,000/- in PPF and purchased 10,000/- NSC and home loan installment payment of Rs. 80,000/-. So he got 1,00,000/- deduction u/s 80C. He paid home loan interest of Rs. 15,000/- so his loss from house property is 15,000/-. Now his total income is 5,80,000 – 1,00,000 – 15,000 = 4,65,000/-
Normal tax 10% of (4,65,000-2,00,000 = 2,65,000) is 26,500/-. Now deduct 5,000/- as rebate u/s 87A. Remaining tax is 21,500/-. Education cess and secondary and Higher education cess will be calculated on this amount.