Income Tax Rebate Under Section 87A: Eligibility, Limits, and Calculation

For the financial year 2024-25 (assessment year 2025-26), section 87A of the Income Tax Act, 1961, allows individuals to get a tax rebate of up to Rs 12,500 if they follow the old tax regime, and up to Rs 25,000 if they choose the new tax regime.

This means that if someone chooses the old tax regime and their taxable income is up to Rs 5 lakh, they don’t have to pay any tax. 

For those who choose the new tax regime, they won’t pay any tax if their taxable income is up to Rs 7 lakh. Remember, the deduction under Section 87A reduces the tax amount payable, not the individual’s income.

Until March 31, 2023 (for the financial year 2022-23), both the old and new tax regime offered a tax rebate for taxable incomes up to Rs 5 lakh, so it didn’t matter which option individuals chose.

However, to encourage more people to use the new tax regime, the tax rebate under section 87A was increased to Rs 25,000 only for the new regime. 

As a result, individuals can pay no tax if their taxable income is up to Rs 7 lakh under the new tax regime starting from April 1, 2023, from the financial year 2023-24.

There were no changes to the tax rebate under Section 87A for the old tax regime for the financial year, 2023-24 and 2024-25.

Should you skip filing your IT return if your net tax liability is zero after the section 87A rebate?

It’s important to understand that even if you don’t owe any taxes, you still need to file your income tax return (ITR) based on the tax regime you choose. Generally, you must file an ITR if your total taxable income goes over the basic exemption limit.

This basic exemption limit varies between the old and new tax rules. 

For the current financial year (FY 2024-25), the basic exemption limit in the new tax regime is Rs 3 lakh. This applies to everyone who chooses the new tax regime, regardless of age. So, if your taxable income is over Rs 3 lakh, you must file an income tax return (ITR).

In the old tax regime, the basic exemption limit depends on your age. For FY 2024-25, it is Rs 2.5 lakh for individuals under 60. For senior citizens (60 to 79 years old), the limit is Rs 3 lakh. For super senior citizens (80 years and older), the limit is Rs 5 lakh. 

So, if you choose the old tax regime and your income exceeds these limits based on your age, you must file an ITR.

How to claim tax rebate under Section 87A

The tax rebate is claimed when you file your income tax return.

Depending on the tax regime you choose, the rebate under section 87A also affects the Tax Deducted at Source (TDS) on your salary.

If you earn a salary and your total taxable income is Rs 7.45 lakh, and you choose the new tax regime, you can subtract a standard deduction of Rs 75,000. 

This leaves you with a net taxable income of Rs 6.70 lakh, which is below the Rs 7 lakh limit. 

Because of this, your employer won’t deduct any tax from your salary, since no tax is owed under the new tax regime for incomes up to Rs 7 lakh.

To claim the tax rebate when filing your ITR (regardless of the tax regime), follow these steps:

Step 1: Calculate your gross total income from all sources.

Step 2: Subtract all eligible deductions.

In the old tax regime, you can take advantage of various deductions and exemptions, such as those under Section 80C, 80D, the standard deduction from salary, HRA tax exemption, and LTA tax exemption.

In the new tax regime, individuals can claim a standard deduction of Rs 75,000 from salary or pension income, along with a deduction under Section 80CCD (2) for the employer’s contribution to the employee’s NPS account.

Step 3: After applying the tax deductions, you will have your net taxable income. 

If net taxable income is below Rs 7 lakh (under the new tax regime) or Rs 5 lakh (under the old tax regime), your final tax payable will be zero. This is because the ITR filing portal will automatically apply the tax rebate under Section 87A.

However, you have to file your income tax return even if net tax liability is zero after rebate under section 87A.

Not everyone can take advantage of the tax rebate under Section 87A. This benefit is only available to resident individuals. Non-resident individuals (NRIs), Hindu Undivided Families (HUFs), and partnership firms are not eligible for tax rebate under section 87A.

Here is a table format to show you how tax rebate is claimed:

Marginal Relief to taxpayer under section 87A

From assessment year 2024-25 (financial year 2023-24), rebate under section 87A is subject to marginal relief.

If net income exceeds 7,00,000 rupees but does not exceed 7,27,770 rupees, then income tax on such income cannot exceed the amount by which the net income exceeds 7,00,000 rupees.

Example showing calculation of income tax rebate U/S 87A

Here is a table showing income tax rebate calculation under section 87A assuming the taxpayer is a resident individual and has not opted for the alternative tax regime under section 115BAC.

Amount in Indian Rupees

What if the resident individual has decided to opt for an alternative tax regime under section 115BAC. Let us see how income tax rebate under section 87A is calculated for the financial year 2024-25 (assessment year 2025-26) with different net income.

Amount in Indian Rupees