Combining Section 87A Rebate with Other Deductions to Achieve Zero Tax
- Farheen Mukadam
- Jul 31
- 9 min read
Section 87A of the Income Tax Act is a significant provision that provides a rebate on the income tax payable by individuals, offering taxpayers a chance to reduce their tax liabilities. This rebate applies to individuals whose total income falls below a specific threshold. With the introduction of the new tax regime and ongoing amendments in tax laws, understanding the latest updates regarding Section 87A is crucial for tax planning. The rebate can significantly ease the tax burden, especially for middle-income earners. Let us understand the recent changes to Section 87A, how you can combine it with various tax deductions to reduce your tax liability to zero, and clarify common queries related to this rebate.
Table of Contents
Understanding Section 87A Rebate: The Latest Updates
The Section 87A rebate provides a direct reduction in the amount of tax payable by an individual. For the financial year 2024-25 (Assessment Year 2025-26), the rebate is available for individuals whose total income is below a specified threshold. The latest updates on Section 87A include a higher rebate for individuals earning under a certain income level, which helps reduce their overall tax burden.
As per the Union Budget 2024, the rebate under Section 87A has been retained at ₹12,500 for taxpayers with a total income of up to ₹5 lakh. This means that if your total income does not exceed ₹5 lakh, you can benefit from a full rebate, making your tax liability nil.
Additionally, this rebate is available to both those who opt for the old tax regime with deductions and exemptions as well as those choosing the new tax regime. This flexibility ensures that more taxpayers can avail of this benefit. However, it's important to note that this rebate is available only on the tax payable and not on the total income, so understanding how your total income is calculated is crucial.
How to Combine Section 87A Rebate with Deductions to Achieve Zero Tax
Combining Section 87A with tax-saving deductions offers a powerful strategy to reduce your tax liability and potentially achieve zero tax. Section 87A provides a direct rebate on the tax payable for individuals with a total income of up to ₹5 lakh. This rebate allows taxpayers to reduce their tax liability by ₹12,500. When combined with eligible deductions, this can lead to a tax liability of zero, making it a highly effective method of tax planning.
The key to maximizing the benefits of Section 87A is using deductions under various sections of the Income Tax Act, such as 80C, 80D, 80G, and others, which lower your taxable income.
Claim Deductions Under Section 80C
The first step in minimizing your tax burden is to utilize the maximum limit available under Section 80C. Section 80C provides a deduction of up to ₹1.5 lakh on eligible investments. This section covers a wide range of tax-saving instruments, including:
Public Provident Fund (PPF): Contributions to a PPF account are eligible for deduction under Section 80C. The interest earned and the maturity amount are also tax-free.
Equity-Linked Savings Scheme (ELSS): Investments in ELSS, which are mutual funds with a tax-saving component, also qualify for a deduction. These are among the fastest-growing options for tax-saving but come with market-linked risks.
National Savings Certificates (NSC): This government-backed scheme offers fixed interest and is eligible for deduction under Section 80C.
Tax-saving Fixed Deposits: Investments in tax-saving FDs with a 5-year lock-in period qualify for deductions.
Employees’ Provident Fund (EPF): Contributions made by you to your EPF account are eligible for tax benefits under Section 80C.
Life Insurance Premiums: Premiums paid for life insurance policies for yourself, your spouse, or your children are eligible for deductions under Section 80C.
By investing in these tax-saving instruments, you can easily reach the ₹1.5 lakh limit, which reduces your taxable income significantly. The more you invest, the lower your taxable income will be.
Use Section 80D for Health Insurance Premiums
Another way to reduce taxable income is by utilizing Section 80D, which provides deductions for health insurance premiums. You can claim:
Up to ₹25,000 for premiums paid for yourself, your spouse, children, and parents (for those under 60 years of age).
Up to ₹50,000 for premiums paid for senior citizen parents (above 60 years of age). This is a significant tax-saving opportunity, especially if you have senior citizen parents, as the deduction is doubled.
Health insurance is an essential expense, and claiming this deduction not only helps reduce your tax liability but also provides a safeguard against medical emergencies. By paying premiums for yourself and your family, you can achieve further reductions in taxable income.
Section 80G for Donations
If you have made charitable donations, Section 80G offers a way to claim deductions for these contributions. Donations to registered charities, NGOs, and other organizations eligible under this section can help reduce your taxable income. The deduction is available for both cash and kind donations, but it’s important to keep receipts for verification.
100% deduction is available for donations to certain organizations, like the Prime Minister's National Relief Fund.
50% deduction is available for donations to other specified charitable institutions.
By donating to charities, you not only contribute to a good cause but also lower your taxable income, which can help bring your total income closer to ₹5 lakh, qualifying you for the Section 87A rebate.
Other Deductions
There are additional deductions available under other sections that further reduce taxable income:
Section 80E (Education Loan): If you have taken an education loan for higher studies, you can claim a deduction on the interest paid under Section 80E. There is no upper limit for this deduction, and it is available for a period of 8 years or until the interest is fully repaid, whichever is earlier.
Section 80TTA/80TTB (Interest on Savings Accounts): Under Section 80TTA, you can claim a deduction of up to ₹10,000 on interest earned from savings bank accounts. For senior citizens, Section 80TTB allows a higher deduction of up to ₹50,000 on interest from savings accounts, fixed deposits, and recurring deposits.
Section 80U (Disability): If you or a dependent family member has a disability, you can claim a deduction under Section 80U. This deduction ranges from ₹75,000 to ₹1.25 lakh, depending on the severity of the disability.
Section 24(b) (Home Loan Interest): If you have taken a home loan, you can claim a deduction of up to ₹2 lakh on the interest paid under Section 24(b) for self-occupied property.
These deductions can significantly reduce your taxable income and bring it closer to or below ₹5 lakh, allowing you to qualify for the Section 87A rebate.
How to Combine Section 87A with Deductions
Once you’ve utilized these deductions, you will lower your taxable income. For example, if your total income is ₹7 lakh and you claim the full ₹1.5 lakh under Section 80C, ₹25,000 under Section 80D, and another ₹50,000 for charitable donations under Section 80G, your taxable income reduces to ₹5.75 lakh.
Now, further utilizing deductions like home loan interest under Section 24(b) and education loan interest under Section 80E, you can reduce your taxable income to below ₹5 lakh. This allows you to apply Section 87A, which provides a direct rebate of ₹12,500 on your tax liability, effectively reducing it to zero.
Common Queries and Clarifications
Can I claim the Section 87A rebate under both the old and new tax regimes? Yes, the Section 87A rebate is available under both the old and new tax regimes. However, under the new regime, you cannot claim deductions like those under Section 80C or 80D. But if your income is below ₹7 lakh, you can still avail of the rebate.
If my income exceeds ₹5 lakh, can I still claim the rebate? No, the Section 87A rebate is only available if your total taxable income is ₹5 lakh or less. If your income exceeds this threshold, you will not be eligible for the rebate.
Is the rebate applicable after all deductions? Yes, the rebate is applied after all deductions have been claimed. If, after applying deductions, your total taxable income falls below ₹5 lakh, you can claim the full rebate under Section 87A.
Can I claim a refund if I mistakenly overpaid taxes, but I qualify for the Section 87A rebate? Yes, if you mistakenly paid more taxes than required and are eligible for the Section 87A rebate, you can claim a refund by filing a revised return.
Conclusion
Section 87A is a powerful tool for taxpayers earning under ₹5 lakh, allowing them to reduce their tax liabilities to zero. By combining this rebate with deductions under other sections, individuals can lower their taxable income even further. Taxpayers should ensure they are utilizing all available deductions, from investments in PPF and ELSS to health insurance premiums, to make the most of these provisions. If you are eligible for the rebate, don’t forget to apply it when filing your tax return, and consult a professional if needed to maximize your savings.
For anyone looking for assistance in tax filing, it is highly recommended to download theTaxBuddy mobile appfor a simplified, secure, and hassle-free experience.
FAQs
Q1: Can I claim the Section 87A rebate if my income is above ₹5 lakh?
No, the Section 87A rebate is only available to individuals whose taxable income is ₹5 lakh or less. If your taxable income exceeds ₹5 lakh, you will not be eligible for the rebate. It is important to calculate your taxable income accurately to ensure you are not missing out on other deductions that could reduce your taxable income below the ₹5 lakh threshold.
Q2: Is the Section 87A rebate applicable to both the old and new tax regimes?
Yes, the Section 87A rebate is available under both the old and new tax regimes. However, under the new tax regime, you cannot claim any other deductions such as those under Section 80C or 80D. It’s important to decide which tax regime is more beneficial for you, based on your income and available deductions.
Q3: How can I reduce my taxable income to qualify for the Section 87A rebate?
To reduce your taxable income and qualify for the Section 87A rebate, you can claim deductions under various sections of the Income Tax Act, such as 80C (for investments in PPF, ELSS, etc.), 80D (for insurance premiums), 80E (for education loans), and 80G (for donations to charity). These deductions lower your taxable income, and if it stays under ₹5 lakh, you qualify for the rebate.
Q4: Can I claim the Section 87A rebate after I have paid taxes?
Yes, you can still claim the Section 87A rebate when filing your Income Tax Return (ITR). If you qualify for the rebate but have already paid taxes, you can file a revised return to claim a refund. It’s essential to make sure all deductions and rebates are applied during your return filing process.
Q5: How much is the Section 87A rebate?
For the Financial Year 2024-25 (Assessment Year 2025-26), the Section 87A rebate is ₹12,500 for individuals with a total income of ₹5 lakh or less in the old tax regime. This means that if your taxable income is under ₹5 lakh, you can reduce your tax liability by ₹12,500. In new tax regime, the rebate is ₹25,000 with a total income of ₹7 lakh or less
Q6: Can I combine Section 87A with other deductions to achieve zero tax?
Yes, you can combine Section 87A with other deductions like those under Section 80C, 80D, 80E, 80G, etc., to bring your taxable income below ₹5 lakh. This can result in zero tax liability, as the rebate would cover the tax due on the reduced income. For example, if your total taxable income is ₹4.5 lakh after applying deductions, you will qualify for the rebate and effectively pay no tax.
Q7: If I miss applying for the Section 87A rebate, can I claim it later?
Yes, you can still claim the Section 87A rebate when filing your return. If you missed claiming it while filing your initial return, you can file a revised return and apply for the rebate. Ensure that you check all available rebates and deductions before submitting your final return.
Q8: Is the Section 87A rebate available to senior citizens?
No, the Section 87A rebate is not specifically restricted based on age. It is available to all taxpayers who meet the income criteria (i.e., a total taxable income of ₹5 lakh or less). However, senior citizens (aged 60 years or more) may be eligible for additional tax benefits such as higher exemptions and deductions under different sections, which could help reduce their taxable income below ₹5 lakh.
Q9: Can I claim Section 87A rebate if I am under the new tax regime?
Yes, you can claim the Section 87A rebate under the new tax regime as long as your taxable income does not exceed ₹7 lakh. However, you will not be able to claim other deductions available in the old regime, such as deductions for insurance premiums, NPS contributions, and home loan interest. It is essential to analyze both regimes to determine which one provides better benefits based on your personal financial situation.
Q10: How do I apply for the Section 87A rebate when filing my return?
When you file your ITR, the Section 87A rebate is automatically applied by the Income Tax Department if your taxable income is below ₹5 lakh. You simply need to fill in the relevant sections in your ITR and ensure that your total income and eligible deductions are correctly calculated. You will then see the rebate reflected in the tax computation section of your ITR.
Q11: Can a business owner claim the Section 87A rebate?
The Section 87A rebate is available to individual taxpayers. Therefore, if you are a business owner and your income is below ₹5 lakh, you can claim the rebate. However, this rebate is not applicable to income generated through business profits; it applies to personal taxable income. If you fall within the income threshold after deducting business-related expenses, you could still be eligible.
Q12: What happens if my income fluctuates and goes above ₹5 lakh during the year?
The Section 87A rebate is based on your total taxable income at the end of the financial year. If your income exceeds ₹5 lakh during the year, you will no longer be eligible for the rebate. However, if you have other deductions or exemptions that can lower your taxable income, you may still qualify for the rebate if your total income falls back under ₹5 lakh. Always consult with a tax professional if your income changes during the year.
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