Section 87A Rebate and HRA Tax Benefits: Maximizing Tax Savings
Rajesh Kumar Kar- Mar 4
- 6 min read
Tax planning plays a crucial role in managing personal finances, and two of the most effective ways to reduce tax liability are through the Section 87A rebate and House Rent Allowance (HRA) tax benefits. While Section 87A provides a rebate for individuals earning below a certain threshold, HRA helps salaried employees lower taxable income by claiming rent deductions.
Many taxpayers are unaware of how these benefits work or whether they can claim them simultaneously. This article provides a detailed guide on Section 87A rebate and HRA tax benefits, eligibility criteria, calculation methods, and strategies to maximize savings.
Table of Contents
Understanding Section 87A Rebate
What is Section 87A?
Section 87A is a tax rebate available to resident individuals whose total taxable income does not exceed a specified limit. The rebate directly reduces the tax payable, making it a significant relief for low-income earners.
Eligibility Criteria for Section 87A Rebate
The taxpayer must be a resident individual (available for both salaried and self-employed individuals).
The total taxable income (after deductions) should not exceed ₹7,00,000 under the new tax regime (₹5,00,000 under the old regime).
The maximum rebate allowed is ₹25,000 under the new tax regime and ₹12,500 under the old tax regime.
The rebate applies only to individuals; Hindu Undivided Families (HUFs) and firms cannot claim it.
How to Calculate Section 87A Rebate?
To calculate the rebate:
Compute gross taxable income (including salary, rental income, capital gains, etc.).
Subtract deductions under Section 80C, 80D, and other applicable sections.
If the net taxable income is ₹7,00,000 or less (new regime) or ₹5,00,000 or less (old regime), apply the rebate.
Deduct the rebate amount from the total tax payable.
Example Calculation (Under New Tax Regime)
Income Component | Amount (₹) |
Gross Salary | 7,20,000 |
Standard Deduction | (-50,000) |
Taxable Income | 6,70,000 |
Tax Before Rebate | 25,000 |
Rebate Under 87A | (-25,000) |
Final Tax Payable | ₹0 |
HRA Tax Benefits: A Key Deduction for Salaried Employees
What is HRA?
House Rent Allowance (HRA) is a salary component provided by employers to help employees pay rent. Under Section 10(13A) of the Income Tax Act, a portion of HRA is exempt from tax if the employee pays rent for accommodation.
Eligibility Criteria for HRA Exemption
The individual must be a salaried employee receiving HRA.
The individual must pay rent for residential accommodation.
HRA exemption is not available under the new tax regime.
If annual rent exceeds ₹1 lakh, the landlord’s PAN details must be provided.
How is HRA Exemption Calculated?
The HRA exemption is the least of the following three amounts:
Actual HRA received from the employer.
50% of basic salary (for metro cities) or 40% of basic salary (for non-metro cities).
Rent paid - 10% of basic salary.
Example Calculation
Component | Amount (₹) |
Basic Salary | 50,000 |
HRA Received | 20,000 |
Rent Paid | 18,000 |
City | Mumbai (Metro) |
Actual HRA received = ₹20,000
50% of Basic Salary = ₹25,000
Rent Paid - 10% of Basic Salary = ₹18,000 - ₹5,000 = ₹13,000
HRA Exempted = ₹13,000 (Least of the three values) Taxable HRA = ₹7,000 (₹20,000 - ₹13,000)
HRA and 87A Rebate: Can You Claim Both?
Many salaried employees wonder whether they can claim HRA tax benefits and Section 87A rebate together. The answer depends on the total taxable income after deductions.
When Can You Claim Both HRA and 87A Rebate?
If the taxable income after HRA exemption and other deductions is below ₹7,00,000, the taxpayer qualifies for the 87A rebate under the new tax regime.
Since HRA is only available under the old tax regime, those opting for HRA must ensure their taxable income does not exceed ₹5,00,000 to be eligible for the 87A rebate.
Example Case
Component | Amount (₹) |
Gross Salary | 6,50,000 |
Standard Deduction | (-50,000) |
HRA Exemption | (-80,000) |
Taxable Income | 5,20,000 |
Eligible for 87A Rebate? | No |
Since the taxable income exceeds ₹5,00,000, the 87A rebate does not apply. If the taxable income were ₹5,00,000 or below, the taxpayer would qualify for a ₹12,500 rebate, making their final tax liability zero.
Maximizing Tax Savings with HRA and 87A Rebate
Choose the Right Tax Regime: If HRA exemptions and Section 80C deductions reduce taxable income below ₹5,00,000, opt for the old regime to claim both HRA and the 87A rebate.
Optimize Salary Structure: Employees should request employers to structure their salaries to maximize HRA benefits.
Submit Rent Receipts on Time: To avoid issues in Form 16, submit rent receipts before the employer’s deadline.
Verify Form 16 with ITR: Ensure HRA exemption is reflected correctly to avoid tax notices.
Conclusion
Section 87A rebate and HRA tax benefits are powerful tools for tax savings when used correctly. While 87A reduces tax liability to zero for low-income individuals, HRA helps salaried employees lower taxable income through rent exemptions. Understanding the rules, eligibility, and choosing the right tax regime can help taxpayers optimize their finances and maximize savings.
FAQs
1. What is the Section 87A rebate, and who can claim it?
Section 87A provides a tax rebate for resident individuals whose taxable income is below a specified threshold. Under the new tax regime, the rebate is available for taxable incomes up to ₹7,00,000, while under the old regime, it applies to taxable incomes up to ₹5,00,000. The rebate reduces the tax payable, making the tax liability zero for eligible taxpayers.
2. Can I claim both HRA tax benefits and the 87A rebate?
Yes, you can claim both HRA tax benefits and the 87A rebate, provided your taxable income after deductions is within the eligible limit for the rebate. However, HRA is only available under the old tax regime, where the 87A rebate is capped at ₹5,00,000 taxable income.
3. How is the HRA exemption calculated for tax benefits?
HRA exemption is calculated as the least of the following three amounts:
Actual HRA received from the employer.
50% of basic salary (if residing in a metro city) or 40% of basic salary (for non-metro cities).
Rent paid minus 10% of basic salary. The exempt amount is deducted from taxable income before calculating tax liability.
4. What happens if my taxable income after HRA deduction exceeds ₹5,00,000?
If your taxable income after deductions (including HRA) exceeds ₹5,00,000 under the old tax regime, you will not be eligible for the 87A rebate. Instead, normal income tax rates will apply to the remaining taxable amount.
5. Can self-employed individuals claim HRA tax benefits?
No, HRA exemption is only available to salaried employees who receive HRA as part of their salary package. However, self-employed individuals can claim a deduction for rent paid under Section 80GG, subject to specific conditions.
6. Is the 87A rebate applicable under both the old and new tax regimes?
Yes, but the eligibility limit differs:
Under the old regime, the rebate applies to taxable incomes up to ₹5,00,000 with a maximum rebate of ₹12,500.
Under the new regime, the rebate is available for taxable incomes up to ₹7,00,000, with a maximum rebate of ₹25,000.
7. How can I maximize my tax savings using HRA and 87A rebate together?
To maximize tax savings:
Opt for the old tax regime if HRA exemptions and Section 80C deductions help reduce your taxable income below ₹5,00,000.
Ensure accurate rent receipts and agreements to claim HRA exemption.
Submit rent receipts to your employer on time to reflect correct calculations in Form 16.
Cross-check Form 16 with your ITR to avoid discrepancies.
8. Can I claim HRA if my employer has not included it in Form 16?
Yes, if you forgot to submit rent receipts to your employer, you can still claim HRA while filing your Income Tax Return (ITR). However, you must manually enter the correct HRA exemption details and keep supporting documents, such as rent receipts and rental agreements, for verification.
9. Can I claim both HRA and home loan interest deductions?
Yes, you can claim both HRA exemption and home loan interest deductions under certain conditions:
You live in a rented house but own a house in another city.
Your self-owned house is under construction, and you are currently paying rent.
You have rented out your self-owned property and are living in a different rented accommodation. However, claiming both for the same property is not allowed.
10. How does claiming HRA affect my eligibility for the 87A rebate?
Claiming HRA reduces your taxable salary, which may help bring your taxable income below ₹5,00,000 under the old tax regime, making you eligible for the 87A rebate. However, if your net taxable income exceeds ₹5,00,000 even after HRA deductions, the rebate will not apply.
11. Can NRIs claim the 87A rebate and HRA tax benefits?
NRIs are not eligible for the 87A rebate since it applies only to resident individuals.
HRA exemption is only available for salaried individuals receiving HRA as part of their salary in India. NRIs can claim rental deductions under Section 80GG, subject to conditions.
12. What documents are required to claim HRA and 87A rebate?
To claim HRA:
Rent receipts signed by the landlord
Rental agreement
Landlord’s PAN details (if rent exceeds ₹1 lakh annually)
Proof of rent payment (bank transfer, cheque, UPI)
For the 87A rebate:
No additional documentation is required, but taxable income should be calculated accurately to ensure eligibility.
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