Understanding Tax Rebate for Small Taxpayers in India

When it comes to tax rebates in India, the concept can be complex, but it is important for taxpayers to understand how they impact their annual tax liability. One of the key provisions in this regard is Section 87A of the Income Tax Act, which offers relief to those with a total income of less than Rs. 5 lakhs. In this article, we will break down the meaning of tax rebate for small tax payers, explain the benefits, and provide examples for better understanding.

What is a Tax Rebate?

Tax rebate, in simple terms, is a credit or relief provided by the government to eligible taxpayers to reduce the amount of tax they owe. This can be a significant factor, especially for individuals with lower incomes, as it can significantly reduce their tax liability. In India, the main provision for tax rebates for small taxpayers is found under Section 87A of the Income Tax Act.

Section 87A of the Income Tax Act

Section 87A of the Income Tax Act specifically provides relief to individuals whose total income does not exceed Rs. 5 lakhs. According to the provision, such individuals are entitled to a rebate from the income tax payable on their total income to the extent of an amount equal to 100 per cent of the tax or an amount of Rs. 2000, whichever is less. This means that as long as an individual falls within the income bracket that qualifies for this rebate, they can benefit from a reduction in the tax they need to pay.

Eligibility Criteria for Tax Rebate Through Section 87A

To be eligible for the tax rebate under Section 87A, an individual’s total income must not exceed Rs. 5 lakhs. This limit is important to note, as those with income above this threshold do not qualify for the rebate. However, it is worth mentioning that the income must be calculated as per the provisions of the Income Tax Act, considering various deductions and exemptions.

Calculating the Tax Liability with Tax Rebate

Let’s start with an example to illustrate how the tax rebate works.

Case 1: An individual earns Rs. 4.5 lacs per year. According to the income tax slab rates, their tax liability would be Rs. 2000. However, since their income is within the limit under Section 87A, they are eligible for a rebate of Rs. 2000. Therefore, their final tax liability would be Rs. 0 (2000 - 2000 0).

Case 2: An individual earns Rs. 4.8 lacs per year. Their calculated tax liability would be Rs. 4000. However, since they are eligible for the Section 87A rebate, they can claim a rebate of Rs. 2000. Therefore, their final tax liability would be Rs. 2000 (4000 - 2000 2000).

It is crucial to note that the rebate is available to individuals with a total income of less than Rs. 5 lakhs. Therefore, in the second case, even though their tax liability is Rs. 4000, they still qualify for the Rs. 2000 rebate under Section 87A.

Fundamentals of Income Tax Slab

To better understand how income tax works, let’s break down the income tax slab in India.

The income tax slab in India is structured in a progressive manner. Here is a simplified example of the slab rates for the 2023-2024 financial year:

Taxable Income Range Slab Rate Up to Rs. 2.5 lakhs 0% Rs. 2.5 lakhs to Rs. 5 lakhs 5% Rs. 5 lakhs to Rs. 7.5 lakhs 20% Rs. 7.5 lakhs to Rs. 10 lakhs 30% Over Rs. 10 lakhs 30% 150% of the amount exceeding Rs. 10 lakhs

For the purposes of the tax rebate discussed here, we will focus on incomes up to Rs. 5 lakhs, where the slab rate is 0% up to Rs. 2.5 lakhs and 5% for the remaining Rs. 2.5 lakhs. This means that for incomes below Rs. 5 lakhs, the actual tax liability is always Rs. 2000, hence the Rs. 5000 rebate mentioned in the initial question is not entirely accurate.

Conclusion

Understanding tax rebates, especially through Section 87A, is crucial for individuals with lower incomes. It can significantly reduce the tax liability, providing much-needed relief. By familiarizing oneself with the eligibility criteria and how the rebate is calculated, taxpayers can better manage their finances and avoid unnecessary stress during tax season.

For any further queries or clarifications, it is always advisable to consult with a tax expert or the official Income Tax Department guidelines.

Key Takeaways:

Tax rebate is a credit provided to eligible taxpayers to reduce their tax liability.

The tax rebate under Section 87A is applicable to individuals with a total income not exceeding Rs. 5 lakhs.

The rebate is calculated as 100 per cent of the tax payable or Rs. 2000, whichever is less.

The current limit for tax rebate under Section 87A was last updated for the 2023-2024 financial year.