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Leveraging Rebate Under Section 87A For Income Upto Rs 5 Lakhs

Author: Balwant Jain/Thursday, April 15, 2021/Categories: Exclusive

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Leveraging Rebate Under Section 87A For Income Upto Rs 5 Lakhs

The government has not changed the basic exemption limit of Rs2.50 lakhs for some time as the government doesn’t want people to go out of the tax net and be exempt from filing income-tax return (ITR).
However, at the same time the successive governments had proposed rebate from taxes for taxpayers up to certain income limit. At present, the rebate of tax is available for those whose income doesn’t exceed Rs5 lakhs. This rebate is available under Section 87A. Let us discuss how it works for you.

What is the exact provision
Section 87A was introduced in Finance Act-2003 and it was changed from time to time. Currently, an individual tax payer, who is resident of India for income tax purpose, is entitled to claim tax rebate upto Rs12,500 against his tax liability if your income doesn’t exceed Rs5 lakh. However, your entitlement to claim the rebate under Section 87A gets lost altogether once the income exceeds this limit.
All are not entitled to avail of this rebate. Though the basic exemption limit of Rs2.50 lakhs is applicable for all Individuals and HUFs whether resident or non-resident, but the rebate under Section 87A is available only to an individual and that too only if he is resident for income tax purposes. So, all the HUFs and non-resident individuals are not entitled for this rebate.
Which income is to be taken into account for the eligibility criteria
There has always been confusion in the minds of taxpayers as to which income is to be considered for the purpose of being eligible for this rebate. It is the income, on which your ultimate tax liability is computed. So, to start with, the income to be considered for this purpose is the income arrived at after setting off all the brought forward old losses against the income of current year. Likewise, from the net income after such set off of losses, you have to reduce all the available deduction under various sections of Chapter VIA. Chapter VIA contains deductions for various items under sections like: Section 80C (For LIP, EPF, PPF, ELSS, tuition fee, home loan repayment etc.), Section 80 CCD (NPS), Section 80 D (Health Insurance), 80 G (donations) and 80 TTA and 80TTB (Bank interest).

Against which tax liability 
The rebate can be adjusted. It is not that the rebate upto Rs12,500 available under Section 87A can be claimed against tax liability of any nature. This rebate can be claimed against your tax liability in respect of normal income, which is taxed at the slab rate, long-term capital gains under Section 112. (Section 112 applies for long-term capital gains on sale of any capital assets other than listed equity shares as well as equity oriented schemes of mutual funds.).
This rebate is also available against your tax liability for short-term capital gains on listed equity shares as well as equity oriented schemes of mutual funds under Section 111A on which tax is payable at flat rate of 15 per cent. Please note, you are not entitled to set off your tax liability in respect of long-term capital gains under Section 112A arising on sale of listed equity shares as well as equity oriented schemes of mutual funds, which is payable 10% after initial exemption of Rs1 lakh.

How rebate actually works
People are generally under the impression that in case their income doesn’t exceed the magic number of Rs5 lakhs, he doesn’t have to pay any tax. This is because for normal income, the tax rate between Rs2.50 lakhs and Rs5 lakhs is five per cent and the tax liability at five per cent on Rs2.50 lakhs comes to exactly Rs12,500. However, in case your income comprises income, which is taxed at higher rate of 15 per cent (being short-term capital gains) or 20 per cent (being other long-term capital gains), you will have to still pay some tax even if your income doesn’t exceed Rs5lakhs. For your income of Rs5 lakhs comprising Rs1 lakhs of short-term capital gains on listed shares of Rs1 lakhs and balance is your regular income. You tax liability would be Rs22,500, comprised Rs7,500 ( 5% on Rs1.50 lakhs) +15,000 (15% on Rs1 lakhs of short-term capital gain). After rebate of Rs12,500 you will have to pay Rs10,000 and Cess even when your income doesn’t exceed the threshold of Rs5 lakhs.

Suggestion to government
Once the income crosses the magical number of Rs5 lakhs, the tax payer is burdened with a tax liability of Rs12,500, even if the incremental income is only a few hundred which is unjust to say the least and will induce tax payers to use ingenious means to bring the income below the threshold limit of Rs5 lakhs. There are provisions of marginal relief in cases where for the tax payers whose income exceeds Rs50 lakhs and who are subjected to surcharge on the income-tax for the entire amount. The provision of marginal relief provides that in no circumstances the incremental tax shall exceed the amount of income which exceeds the threshold limit for surcharge. The similar provision needs to be added to the existing provision of Section 87A.

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