Rebate u/s 87A for F.Y 2019-20 and A.Y 2020-21

Rebate u/s 87A for F.Y 2019-20 and A.Y 2020-21. Are you eligible to claim the rebate of ₹12,500? 

Tax Rebate us 87A

Since there has been a tremendous increase in the numbers of income tax return filers in very recent years, the Central Government has embraced this act of tax payers , and as a result, in the Finance Bill 2019 introduced or rather I would say enhanced the existing income tax rebate u/s 87A of the I.T Act up to 12500 from the F. Y 2019-20. On the other hand, this decision of the Government has made the middle-class people very much happier as this would leave them richer by Rs ₹12500 annually. 

The Finance bill 2019 may be read to the extent of rebate clause only as follows:–

Clause 8 of the Bill seeks to amend section 87A of the Income-tax Act to provide relief to the individual taxpayers by increasing the maximum amount of tax rebate to twelve thousand five hundred rupees from existing two thousand five hundred rupees. The tax rebate shall now be admissible to taxpayers having total income up to five hundred thousand rupees, instead of existing three hundred fifty thousand rupees.

What is a Tax Rebate?

Before, going in to detail on should know what a tax rebate is all about. Rebate means acknowledging your liability to pay tax but allowing you relief or deduction so that you don’t need to pay your tax liability on the fulfillment of certain conditions. This means the Government is granting you a relief to pay tax up to a certain limit on attaining certain conditions. Further, as per Wikipedia, a Tax Rebate can be defined as the refund of taxes when the tax liability is less than the taxes paid.

So, a tax rebate is basically a refund of tax which an individual can claim upfront from his income tax liability. There is a tax liability for you but you are not supposed to pay that as per the rebate u/s 87A. However, this tax rebate is applicable only to the small tax payers.

Eligibility factors to claim tax rebate u/s 87A for F. Y 2019-20

The following factors or conditions need to be fulfilled before claiming deductions or rebate u/s 87A.

  • One needs to be a resident INDIAN;
  • Your Net Taxable Income  i.e. total income after all deductions u/s 80C to 80 U is less than or equal to ₹5.00 Lakh;
  • The maximum rebate U/S 87A is capped at ₹12500 only.  If your tax liability before adding Cess@4% is below ₹12500, then you will be allowed rebate up to that amount only;
  • No Non Resident Indian is entitled to this rebate;
  • No HUF, partnership firm or company is entitled to this rebate.

Now let’s see some examples how rebate u/s 87A will be allowed.

Income Tax liability calculation and eligibility of rebate u/s 87A

Now, let’s see in the below example how rebate u/s 87a would be allowed  for a person below 60 years of age having income at different levels where the minimum tax exemption limit is ₹2,50,000.

Net Taxable Income(N.T.I) Tax payable before adding Cess Rebate u/s 87A Total Tax payable after adding Cess@4%
₹ 3,20,000 ₹3,500 ₹3,500 0
₹ 3,90,000 ₹7,000 ₹7,000 0
₹ 4,50,000 ₹10,000 ₹10,000 0
₹ 4,99,999 ₹12,500 ₹12,500 0
₹ 5,00,001 ₹12,500 0 ₹13,000

So, from the above example you can see that for income up to Rs.5 Lakh, the maximum rebate of ₹12500 is being allowed. But for Net Taxable Income above ₹5 Lakh, no rebate is being allowed. Even for extra income of Re.1 over ₹5 Lakh is being denied from the tax rebate. This is the real tricky part here. You can not avail the benefit of rebate as per the Finance Bill 2019 if your Net Taxable Income exceeds ₹5 Lakh.

You may want to read the following article:

So, it is very imminent that from F.Y 2019-20 on wards you have to have a tax planning mechanism in place for small tax payers so that your total income does not exceed ₹5 Lakh. Else, you will be denied from tax rebate as shown above.

Now, let’s see in the below example how rebate u/s 87a would be allowed  for a Senior citizen above 60 years of age  having income at different levels where the minimum tax exemption limit is ₹3,00,000.

Net Taxable Income(N.T.I)

Tax payable before adding Cess Rebate u/s 87A

Total Tax payable after adding Cess@4%

₹ 3,20,000

₹1,000 ₹1,000

0

₹ 3,90,000

₹4,500 ₹4,500

0

₹ 4,50,000

₹7,500 ₹7,500

0

₹ 4,99,999

₹10,000 ₹10,000

0

₹ 5,00,001

₹10,000 0

₹10,400

So, from the above example you can see that for income up to ₹5 Lakh, the maximum rebate of ₹10,000 is being allowed to senior citizens. But for Net Taxable Income above ₹5 Lakh, no rebate is being allowed. Quite interestingly,It is not clear that why the finance bill did not consider the rounding off concept of income below ₹5 as zero as it used to be earlier. So, senior citizen individuals earning more than 5 Lakh are also are required to do some tax planning to save taxes in form of rebate. Or they can have the help of tax experts to claim rebate under section 87A.

Who can claim tax rebate under section 87A?

As mandated by the finance bill 2019 the following persons can claim the tax rebate under section 87a.

  • A resident individual;
  • A resident individual whose Net Taxable Income  i.e. total income after all deductions u/s 80 is less than or equal to ₹5.00 Lakh;
  • No Non Resident Indian is entitled to this rebate;
  • To claim this rebate you must not be a HUF, partnership firm or company.

How much is the tax rebate under section 87A?

One should keep in mind that this finance bill 2019 has just enhanced the rebate limit from existing ₹2500 to ₹12500 only. Rebate u/s 87a is not a new thing. Earlier also it was enforced subject to different income ceiling. So, the rebate u/s 87a is a mere amendment under finance bill 2019.

For F.Y 2017-18 the existing rebate limit was ₹2500 subject to net taxable income up to Rs 3.5 lakh. NOw from F.Y 2019-20 it has been enhanced to ₹12500 subject to net taxable income up to Rs.5 lakh.

Let’s see the below example to understand the implication of tax rebate u/s 87a for two financial years simultaneously.

Net Taxable Income(₹) Tax payable before adding Cess(₹) Rebate u/s 87A for for F.Y 2018-19(₹) Tax Payable + 4% Cess for F.Y 2018-19(₹) Rebate u/s 87A  F.Y for 2019-20(₹) Tax Payable + 4% Cess for F.Y 2019-20(₹)

2,65,000

750 750 0 750 0

2,70,000

1000 1000 0 1000

0

3,00,000

2,500 2,500 0 2,500

0

3,50,000

5,000 2,500 2,600 5,000

0

5,00,000

12,500 0 13,000 12500

0

5,50,000(Income exceeds 3.5 Lakh and 5 Lakh. SO no rebate)

22,500

0 23,400 22500

23400

So, from the above example we can see that for F.Y 2019-20, it is quite beneficial for individuals earning above ₹5 lakh to avail rebate under section 87a.

Does one need to file income tax return even if his tax liability after rebate is nil?

As per the Income Tax Act, to avail the benefit of any kind of deductions from his earnings one needs to file income tax return every year. Even if an individual’s income exceeds the threshold exemption limit of ₹2.5 Lakh and he does not have to pay any tax with out deduction but avails the benefit of rebate u/s 87A , he must file his income tax return to avail the benefit of rebate u/s 87A.

Income Tax liability calculation and eligibility of rebate u/s 87A

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