Understanding Section 87A Rebate and How to Maximize It While Filing Your Tax Returns\

Section 87A of the Income Tax Act offers a valuable tax rebate to individuals with taxable income below a certain threshold. For eligible taxpayers, this rebate directly reduces the total tax liability, making it an important provision, especially for those with modest incomes. For the Financial Year 2024-25 (Assessment Year 2025-26), the rebate under Section 87A allows a reduction of up to ₹12,500 for individuals earning taxable income up to ₹5 lakh. This means that if your taxable income is ₹5 lakh or less, you can reduce your tax liability by ₹12,500, effectively making your income tax liability zero.

To claim the rebate, taxpayers must ensure that their total taxable income falls within the prescribed limit. The rebate is available under both the old and new tax regimes, but specific conditions must be met. It is important to understand how Section 87A applies in various scenarios to optimize your tax filings and take full advantage of the rebate.

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Table of Contents

• What is Section 87A Rebate?

• Latest Updates for FY 2025-26 (AY 2026-27)

• How to Claim the Section 87A Rebate

• Maximizing the Section 87A Rebate

• Section 87A Rebate Comparison Table

• Conclusion

• FAQs

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What is Section 87A Rebate?

Section 87A of the Income Tax Act is a tax rebate provided to individual taxpayers, offering them a reduction in their total tax liability. This rebate is available to taxpayers whose annual taxable income does not exceed a specific threshold. The rebate directly reduces the amount of income tax payable, making it an essential provision for individuals in the lower income brackets.

For taxpayers falling under this section, the rebate can reduce their tax liability by up to ₹12,500 (for those earning below ₹5 lakh annually). This means that if your taxable income is ₹5 lakh or below, your total tax liability could be eliminated, depending on other deductions and exemptions you may qualify for. Section 87A ensures that individuals with low incomes are not overburdened with taxes and receive some relief.

Latest Updates for FY 2025-26 (AY 2026-27)

The Financial Year 2025-26 (Assessment Year 2026-27) brings notable updates to Section 87A of the Income Tax Act, particularly benefiting individuals with taxable incomes of ₹5 lakh or less. This section provides a rebate on the income tax liability, effectively reducing the tax burden for lower-income earners. Below, we dive deeper into the key aspects of this update and how it impacts taxpayers.

Continuation of Rebate Under Section 87A for Low-Income Earners

For individuals earning taxable income of ₹5 lakh or less, the rebate under Section 87A continues, with a set amount of ₹12,500. This rebate effectively reduces the income tax liability for eligible taxpayers to zero. This provision is a crucial step in ensuring that low-income earners do not bear a heavy tax burden, aligning with the government’s commitment to making the tax system more equitable.

The rebate ensures that for individuals with taxable income up to ₹5 lakh, no income tax is payable, helping to ease financial pressures on those in the lowest income brackets. This initiative has been consistent over the years and continues into FY 2025-26, reinforcing the government’s approach to providing tax relief to the middle and lower-income segments of the population.

Eligibility and Conditions for Section 87A Rebate

To qualify for the Section 87A rebate in FY 2025-26, taxpayers must meet the following criteria:

• Taxable Income Under ₹5 Lakh: Only individuals whose taxable income, after deductions and exemptions, remains under ₹5 lakh are eligible for this rebate. This means that once you apply any eligible exemptions (such as those under Section 80C or 80D) and deductions, your final taxable income must be ₹5 lakh or below.
  

• New Tax Regime Applicability: The Section 87A rebate applies under the new tax regime as well, which simplifies the tax structure by offering lower tax rates but removing the possibility of claiming certain deductions like 80C, 80D, and others. In the new regime, the rebate amount remains ₹12,500 for eligible individuals with taxable income under ₹5 lakh.

Old Tax Regime and Its Interaction with Section 87A Rebate

While the rebate under Section 87A is explicitly available under the new tax regime, individuals opting for the old tax regime are not left out. The old tax regime still allows individuals to claim exemptions and deductions under various sections such as 80C, 80D, 80G, and others. If your total taxable income falls below ₹5 lakh after applying these exemptions and deductions, you can still claim the ₹12,500 rebate under Section 87A.

However, it’s important to note that under the old regime, if your taxable income is under ₹5 lakh before applying deductions, you will not be eligible for this rebate. You must calculate your income after applying deductions to determine eligibility.

Simplifying Tax Filing for Low-Income Earners

The government’s decision to continue the Section 87A rebate reflects its ongoing efforts to simplify the tax filing process for individuals with lower incomes. By ensuring that taxpayers with taxable income below ₹5 lakh do not have to pay taxes, the government is aiming to ease the financial burden on low-income groups. This is part of the broader effort to make the tax system more inclusive and accessible.

For taxpayers choosing the new tax regime, the process becomes even simpler, as they are not required to keep track of multiple deductions and exemptions. The rebate is straightforward, reducing their overall tax liability. On the other hand, those who opt for the old tax regime still have the flexibility to claim exemptions and deductions, but they must ensure that their taxable income after deductions remains below ₹5 lakh to benefit from the Section 87A rebate.

Government’s Focus on Low-Income Taxpayers

The continuation of the Section 87A rebate under both tax regimes signals the government’s ongoing focus on easing the tax burden for low-income earners. By keeping the rebate amount at ₹12,500, the government ensures that those in the lowest income brackets continue to benefit from tax relief, which contributes to reducing income inequality.

In addition to providing direct financial relief, the rebate under Section 87A also reflects the government’s larger goal of simplifying the tax process for individuals, particularly those who do not have access to complex tax-saving strategies or financial advice. This move is aligned with the broader push towards digitization and ease of compliance in the tax system, as evidenced by the growing number of taxpayers choosing online platforms for tax filing.

Strategic Tax Planning for the 2025-26 Assessment Year

For taxpayers, this update offers an opportunity to review their tax planning strategies, particularly when it comes to choosing between the new and old tax regimes. Those who typically utilize exemptions and deductions will likely benefit from the old tax regime, while those with simpler tax situations and fewer deductions may find the new tax regime more beneficial, especially since it reduces the number of tax-saving instruments needed to maximize benefits.

The continued availability of the Section 87A rebate under both tax regimes ensures that low-income taxpayers are supported, regardless of which tax regime they opt for. Taxpayers should carefully assess their income levels and tax-saving options before deciding which tax regime to follow for FY 2025-26 to maximize their savings.

How to Claim the Section 87A Rebate

Claiming the Section 87A rebate is simple and straightforward, but it requires careful attention to your taxable income and tax regime choice. Here’s how you can claim the rebate:

• Determine Eligibility: Ensure your total taxable income (after applying deductions and exemptions) is below ₹5 lakh. This is the most crucial step, as the rebate is only available to individuals earning less than ₹5 lakh in taxable income.
  

• Choose Your Tax Regime: Section 87A applies to both the old and new tax regimes, but if you opt for the new tax regime, you cannot claim exemptions or deductions like those under Section 80C, 80D, etc. If you prefer the deductions available under the old tax regime, you must apply them first and ensure your taxable income remains below ₹5 lakh.
  

• Apply for the Rebate: The rebate is applied automatically in the ITR form. If you are filing your tax return through platforms like TaxBuddy, the system will calculate the rebate based on your taxable income. Ensure that you select the appropriate tax regime and input all your income details accurately.
  

• Verify Your Tax Liability: The Section 87A rebate will be deducted from your total tax liability, up to a maximum of ₹12,500. If your calculated tax is ₹12,500 or less, the rebate will reduce your tax liability to zero.

Maximizing the Section 87A Rebate

While the Section 87A rebate is primarily aimed at those earning taxable income up to ₹5 lakh, there are a few strategies to maximize its benefit:

• Optimize Your Income to Stay Below ₹5 Lakh: If you’re just above ₹5 lakh, consider strategies like contributing to eligible tax-saving instruments under Section 80C (such as PPF, EPF, or life insurance premiums) to reduce your taxable income. By doing so, you can bring your taxable income within the ₹5 lakh threshold and claim the Section 87A rebate.
  

• Choose the Right Tax Regime: If you have significant deductions or exemptions under the old tax regime, it may be worth opting for that regime, even if your taxable income is close to ₹5 lakh. This will allow you to use deductions like 80C to reduce your taxable income, and you can still claim the rebate under Section 87A.
  

• Track All Applicable Deductions: Make sure you don’t miss any available deductions (under the old tax regime). Contributions to NPS, insurance premiums, and home loan interest can significantly reduce your taxable income. Ensuring that your income stays below ₹5 lakh after deductions will allow you to take full advantage of the rebate.
  

• Plan for Tax-saving Investments Early: Tax-saving investments under Section 80C should be planned at the start of the financial year, not at the last minute. This allows you to adjust your income throughout the year and ensures that you can benefit from the Section 87A rebate.

Section 87A Rebate Comparison Table

Income Level	Taxable Income (Post-Deductions)	Tax Liability	Section 87A Rebate	Net Tax Payable
Below ₹5 Lakh	₹5,00,000 or less	₹12,500	₹12,500	₹0
₹5 Lakh to ₹7.5 Lakh	₹6,50,000 (after deductions)	₹19,000	₹12,500	₹6,500
₹7.5 Lakh to ₹10 Lakh	₹9,00,000 (after deductions)	₹39,000	₹12,500	₹26,500
Above ₹10 Lakh	₹12,00,000 (after deductions)	₹1,20,000	₹12,500	₹1,07,500

Conclusion

The Section 87A rebate is an invaluable tool for reducing your tax liability. By understanding the eligibility criteria and maximizing your deductions, you can significantly lower your taxable income and potentially eliminate your tax liability altogether. For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.

FAQs

Q1: How can I qualify for Section 87A rebate?

You qualify for the Section 87A rebate if your total taxable income is ₹5 lakh or below. This rebate directly reduces your income tax liability. For example, if your taxable income is ₹5 lakh, you can claim a ₹12,500 rebate, effectively reducing your tax liability to zero. This rebate is available under both the old and new tax regimes, but you must ensure that your total income falls within the ₹5 lakh threshold for eligibility.

Q2: Can I claim Section 87A in both the old and new tax regimes?

Yes, Section 87A is available under both the old and new tax regimes. However, there’s a key difference: under the new tax regime, you are not allowed to claim other deductions like those under Section 80C (for instance, deductions on investments in PPF or ELSS). Therefore, while you can claim the ₹12,500 rebate under both regimes, the old tax regime offers more opportunities for reducing your taxable income through various exemptions and deductions.

Q3: Can Section 87A rebate eliminate my entire tax liability?

Yes, if your taxable income is ₹5 lakh or less, the Section 87A rebate can eliminate your entire tax liability. For example, if your taxable income is ₹5 lakh, the rebate of ₹12,500 will reduce your total tax payable to zero. If your taxable income is below ₹5 lakh, you will not owe any income tax after applying the rebate.

Q4: What if my taxable income is slightly above ₹5 lakh?

If your taxable income is slightly above ₹5 lakh, you can reduce it to qualify for the Section 87A rebate. For example, by utilizing deductions under the old tax regime, such as those under Section 80C (e.g., investments in PPF, life insurance premiums, etc.), you may be able to bring your taxable income below ₹5 lakh, thus qualifying for the rebate.

Q5: How does Section 87A work with the new tax regime?

Under the new tax regime, Section 87A is still applicable as long as your taxable income is ₹5 lakh or below. However, the new tax regime does not allow you to claim exemptions or deductions, such as those under Section 80C, which means your tax-saving options are limited. If your taxable income is ₹5 lakh or less, the rebate will reduce your liability to zero. For individuals opting for the new tax regime, this rebate offers a significant benefit.

Q6: Does Section 87A apply to all taxpayers?

No, Section 87A primarily benefits individual taxpayers whose taxable income is ₹5 lakh or less. It is not applicable to businesses, corporations, or non-individual taxpayers like Hindu Undivided Families (HUFs), firms, or companies. This rebate is meant specifically for individuals, providing them with financial relief if their income is within the prescribed limit.

Q7: Can I use TaxBuddy to apply for the Section 87A rebate?

Yes, TaxBuddy automatically calculates and applies the Section 87A rebate based on your taxable income. The platform ensures that if your income falls within the ₹5 lakh limit, the rebate is applied, reducing your income tax liability to the eligible amount. TaxBuddy streamlines this process to ensure you don’t miss out on any eligible benefits.

Q8: Will the Section 87A rebate be available every year?

Yes, the Section 87A rebate has been available for several years and is typically renewed annually in the Union Budget. However, taxpayers should always check the latest finance budget for any potential changes or revisions to this rebate. The government may adjust the threshold or eligibility criteria depending on fiscal policies. It’s important to stay informed to ensure you’re making use of all available benefits.

Q9: Can I claim Section 87A if I have other income sources?

Yes, you can claim Section 87A if your total taxable income is ₹5 lakh or less, regardless of the number of income sources you have. For example, you may have salary income and rental income, but as long as your total taxable income after deductions and exemptions remains below ₹5 lakh, you are eligible for the rebate.

Q10: Does the rebate apply after I deduct other expenses or exemptions?

Yes, the Section 87A rebate is applied after all other deductions and exemptions have been factored into your taxable income. So, if your income is initially above ₹5 lakh, but you claim deductions such as those under Section 80C, your taxable income might fall below ₹5 lakh, making you eligible for the rebate. The rebate reduces your income tax liability after considering all such adjustments.

Q11: Can the Section 87A rebate be claimed on business income?

Yes, Section 87A applies to business income as long as the total taxable income from the business, after deductions and exemptions, is ₹5 lakh or below. This is particularly beneficial for sole proprietors or freelancers who report business income. As long as their final taxable income is below the threshold, they can apply the rebate to reduce their tax liability.

Q12: How do I maximize my Section 87A rebate?

To maximize your Section 87A rebate, ensure that your taxable income stays below ₹5 lakh. This can be achieved by utilizing eligible tax-saving options such as investments in PPF, NPS, or other Section 80C deductions under the old tax regime. It’s also important to accurately report your income and deductions, ensuring that you take full advantage of exemptions like HRA, interest on home loans, and others that could reduce your taxable income to below the ₹5 lakh threshold.