Rebate under section 87A
Section 87A provides a tax rebate to individual taxpayers whose total income is below a prescribed limit. It directly reduces the tax payable, making low‑income earners pay little or no tax. Understanding the rebate is essential for the NISM Investment Adviser exam because advisers must calculate client tax liabilities accurately and advise on tax‑efficient investment strategies. This sub‑topic fits within the Concepts in Taxation chapter, linking income tax provisions to financial planning.
Learning Objectives
- 1Define the rebate under Section 87A and its purpose.
- 2Identify eligibility criteria and income thresholds.
- 3Calculate tax payable after applying the rebate.
- 4Recognise common exam traps related to Section 87A.
What is Rebate under Section 87A?
Section 87A of the Income Tax Act, 1961, offers a rebate on income tax for resident individuals whose total taxable income does not exceed a specified ceiling. The rebate is a direct reduction of the tax liability, not a deduction from gross income.
The primary aim is to provide tax relief to low‑income earners, thereby encouraging savings and investment among this segment. For the Assessment Year 2024‑25 (FY 2023‑24), the rebate amount is capped at Rs. 5,000 and is available to individuals with total income up to Rs. 5 lakh. The limit and ceiling are periodically revised through the Finance Act.
In the NISM exam, questions may ask you to identify the rebate amount, the income ceiling, or to compute the final tax payable after applying the rebate. Remember that the rebate is applied after all deductions (e.g., under Section 80C) and exemptions have been accounted for.
- Rebate reduces tax liability, not taxable income.
- It is available only to resident individuals, not HUFs or firms.
Students often mix up the *total income* ceiling (Rs. 5 lakh) with the *taxable income* after deductions. The rebate eligibility is based on total income before deductions, so always check the gross total before applying Section 80C, 80D, etc.
Eligibility Criteria & Income Thresholds
To claim the rebate, the assessee must satisfy all of the following conditions:
1. Resident Individual: Only individuals who are residents of India for tax purposes qualify. Non‑residents, Hindu Undivided Families (HUFs), firms, and companies are excluded.
2. Income Ceiling: The total income (gross, before any deductions) must be ≤ Rs. 5 lakh for AY 2024‑25. This ceiling has been unchanged since AY 2019‑20, but always verify the latest Finance Act for updates.
3. Positive Tax Liability: The calculated tax liability before rebate must be greater than zero; otherwise, there is no tax to rebate.
Exam‑wise, you may be given a scenario with gross income, deductions, and asked whether the rebate applies. Follow the order: compute gross total → check ≤ 5 lakh → compute tax liability → apply rebate.
How the Rebate is Calculated
After computing the tax liability using the applicable slabs, the Section 87A rebate is subtracted directly from that liability. The maximum rebate allowed is Rs. 5,000, but the actual amount cannot exceed the tax liability itself.
The calculation can be expressed as:
Tax Payable = Tax Liability – Rebate, where Rebate = min(5,000, Tax Liability) provided the income ceiling condition is met.
This simple arithmetic is frequently tested. Remember that the rebate is not a percentage; it is a fixed amount subject to the ceiling of Rs. 5,000.
Where:
Tax_{payable}= Final tax payable after rebate (Rs.)Tax_{liability}= Tax computed on taxable income before rebate (Rs.)Rebate= Section 87A rebate amount, = min(5,000, Tax_{liability}) (Rs.)Worked Example
Given Tax_{liability} = 12,000: Step 1: Rebate = min(5,000, 12,000) = 5,000 Step 2: Tax_{payable} = 12,000 - 5,000 = 7,000 Verification: 12,000 - 5,000 = 7,000.
Impact of Rebate Across Income Slabs
Because the rebate is a flat Rs. 5,000, its impact is proportionally larger for lower incomes. For a taxable income of Rs. 3 lakh, the rebate may reduce the effective tax rate by several percentage points, whereas for an income of Rs. 7 lakh the effect is marginal.
Understanding this gradient helps advisers recommend tax‑efficient investment products. For instance, a client earning Rs. 4.5 lakh may benefit more from a tax‑saving instrument that keeps total income below the 5 lakh ceiling.
Exam questions often present a table of incomes and ask you to compute the effective tax rate after rebate. Practice the arithmetic to avoid calculation errors.
Tax Liability Before and After Section 87A Rebate
| Total Income (Rs.) | Tax Liability (Rs.) | Rebate (Rs.) | Tax Payable (Rs.) | Effective Tax Rate (%) |
|---|---|---|---|---|
| 2,50,000 | 0 | 0 | 0 | 0.0 |
| 3,50,000 | 5,250 | 5,000 | 250 | 0.07 |
| 4,80,000 | 12,600 | 5,000 | 7,600 | 1.58 |
| 5,20,000 | 14,800 | 5,000 | 9,800 | 1.88 |
| 7,00,000 | 42,500 | 5,000 | 37,500 | 5.36 |
Effective Tax Rate After Section 87A Rebate
Interaction with Other Deductions & Exemptions
The Section 87A rebate is applied after all permissible deductions (e.g., under Sections 80C, 80D, 80G) and exemptions (e.g., HRA, LTA) have been accounted for. It does not replace any deduction; rather, it is an additional relief.
If a taxpayer’s tax liability becomes zero after deductions, the rebate is irrelevant because there is no tax to offset. Conversely, if the liability is less than Rs. 5,000, the rebate equals the liability, resulting in zero tax payable.
For exam purposes, always compute deductions first, then the tax liability, and finally apply the rebate. Forgetting the order is a common source of mistakes.
The rebate is a *post‑tax* reduction. Do not treat it as an additional deduction under Section 80C or as a credit against gross income. Applying it twice will inflate the tax benefit and lead to a wrong answer.
Scenario
Rohit, a resident individual, has a gross total income of Rs. 4,80,000. He claims deductions of Rs. 1,00,000 under Section 80C and Rs. 25,000 under Section 80D. Compute his tax payable for AY 2024‑25 after applying the Section 87A rebate.
Solution
Step 1: Compute taxable income = 4,80,000 – (1,00,000 + 25,000) = 3,55,000.\nStep 2: Apply the FY 2023‑24 tax slabs for individuals:\n- Up to 2,50,000: Nil\n- 2,50,001–5,00,000: 5% on (3,55,000 – 2,50,000) = 5% of 1,05,000 = 5,250.\nTax Liability before rebate = Rs. 5,250.\nStep 3: Check eligibility – total income (4,80,000) ≤ 5,00,000, so rebate applies.\nStep 4: Rebate = min(5,000, 5,250) = 5,000.\nStep 5: Tax Payable = 5,250 – 5,000 = 250.\nThus, Rohit pays only Rs. 250 as tax for the year.
Conclusion
The example shows that even a modest tax liability can be almost eliminated by the Section 87A rebate when the income ceiling is respected. Remember to verify the total income first, then compute tax, and finally apply the rebate.
⭐Exam Takeaways
- Section 87A provides a flat rebate of up to Rs. 5,000 for resident individuals with total income ≤ Rs. 5 lakh.
- The rebate is applied after all deductions and exemptions; it reduces tax liability, not taxable income.
- Rebate amount = min(5,000, Tax Liability). If Tax Liability < 5,000, the rebate equals the liability, resulting in zero tax payable.
- Eligibility is based on gross total income before deductions – a frequent source of exam errors.
- Order of computation: Gross income → deductions → taxable income → tax liability → rebate.
- The rebate cannot be claimed by non‑residents, HUFs, firms, or companies.
- When tax liability is zero, the rebate is irrelevant; when liability is less than Rs. 5,000, the rebate wipes out tax completely.
- Remember the exam trap: do not treat the rebate as an additional deduction under Section 80C.
Practice Questions
8 questions on Rebate under section 87A
What is the maximum rebate amount under Section 87A for Assessment Year 2024‑25?
Which of the following taxpayers can claim the Section 87A rebate?
Rohit, a resident individual, has a gross total income of Rs.4,80,000 and deductions of Rs.1,25,000. After computing tax liability of Rs.5,250, what is the amount of Section 87A rebate he can claim?
In applying Section 87A, which sequence is correct?
A resident individual has total income Rs.5,20,000 and deductions Rs.1,00,000, giving taxable income Rs.4,20,000. Is the Section 87A rebate available?
A resident individual with total income Rs.5,20,000 and deductions Rs.1,00,000 has a tax liability of Rs.14,800 before rebate. According to the study material, is the Section 87A rebate applicable and what is the final tax payable?
Two resident individuals, A and B, each have taxable income of Rs.3,55,000 after deductions. A’s total income before deductions is Rs.4,80,000, B’s is Rs.5,20,000. Assuming both have a tax liability of Rs.5,250 before rebate, which taxpayer will have a lower effective tax rate after applying Section 87A?
If a resident individual’s tax liability before rebate is Rs.4,000, what will be the tax payable after applying Section 87A?