How to Maximize Section 87A Rebate and Avoid Scrutiny for Underreported Income in Your ITR
- Bhavika Rajput
- Jun 19
- 10 min read
Section 87A of the Income Tax Act can reduce your tax liability to zero if your total taxable income stays within specified thresholds. For FY 2024-25, the old regime allows a rebate up to ₹12,500 for incomes up to ₹5 lakh. The new regime is more generous, with a ₹25,000 rebate for incomes up to ₹7 lakh, and from FY 2025-26, this increases further to ₹60,000 for incomes up to ₹12 lakh. But to benefit fully and avoid tax notices, careful income reporting and accurate ITR filing are critical.
Table of Contents
Understanding Section 87A Rebate Rules and Limits
Section 87A offers a direct rebate on the final tax liability, not a deduction from income. This rebate is applicable before the 4% health and education cess and can nullify the entire tax payable, provided income remains under the prescribed limits. The applicable limits vary by the tax regime and financial year, as shown in the comparison table above. This provision is a powerful tool for tax savings if used correctly.
Is Section 87A Available Under the New Tax Regime?
Yes. The new tax regime provides the Section 87A rebate, but with different thresholds:
For FY 2024-25, income up to ₹7 lakh qualifies for a ₹25,000 rebate.
From FY 2025-26, the limit increases to ₹12 lakh with a rebate of ₹60,000.
However, no additional deductions (like 80C, 80D) can be used under the new regime to lower taxable income.
How Section 87A Works in the Old Tax Regime
Under the old regime, you can use various deductions to reduce your taxable income:
₹1.5 lakh under Section 80C
Health insurance premiums under 80D
Interest from savings under 80TTA
Once your post-deduction income is ₹5 lakh or less, you're eligible for a rebate of ₹12,500—effectively bringing your tax to zero.
Eligibility Criteria for Claiming Section 87A Rebate
Only resident individuals are eligible.
Applicable to both salaried and non-salaried individuals.
Senior citizens (60–79 years) qualify, but super senior citizens (80+) do not.
Rebates do not apply to HUFs, firms, or companies.
The benefit is available only before applying the cess.
Steps to Maximize Section 87A Rebate in Your ITR
Choose the Appropriate Tax Regime
Before filing your return, assess your total income, available deductions, and applicable tax slab under both regimes. The old regime lets you claim multiple deductions, while the new regime offers lower tax rates and a higher rebate threshold but disallows most exemptions. For instance, if your taxable income after deductions falls below ₹5 lakh, the old regime may be more beneficial due to the ₹12,500 rebate. If you’re not claiming many deductions and your income is up to ₹7 lakh (FY 2024-25) or ₹12 lakh (FY 2025-26), the new regime could eliminate your tax liability completely. Use regime comparison calculators on platforms like TaxBuddy to decide which regime aligns better with your situation.
Use Deductions Wisely (Old Regime)
If you opt for the old regime, maximize deductions to bring your taxable income under the ₹5 lakh threshold. Common deductions include:
Section 80C: Contributions to PPF, EPF, life insurance premiums, ELSS, and tuition fees (up to ₹1.5 lakh).
Section 80D: Premiums paid for health insurance for self, spouse, children, and parents.
Section 80TTA: Interest income from savings bank accounts (up to ₹10,000).
Properly planning your investments and expenses can help you legally qualify for the rebate and reduce your tax outgo to zero.
Track All Income Sources
Taxpayers often miss out on reporting income beyond their salary. To avoid both underreporting and losing the rebate:
Include interest from savings accounts and fixed deposits.
Declare rental income from owned property.
Report freelance, gig, or part-time work.
Don’t ignore dividend or capital gain incomes.
Missing even a small income component can push your total above the rebate threshold, disqualifying your claim and increasing the risk of scrutiny.
Cross-Verify Taxable Income
Before filing, confirm your taxable income figure is accurate. Tax calculators provided by trusted platforms like TaxBuddy allow you to input your salary, other income, and deductions. These tools generate real-time tax liability and show whether you qualify for the Section 87A rebate. Reviewing this ahead of time prevents errors, especially when switching between regimes or trying to stay within a rebate bracket.
Ensure Rebate is Auto-Applied in ITR
Most income tax return forms automatically apply the Section 87A rebate once your income qualifies. However, always double-check the computation summary on the ITR portal or within your chosen platform before submission. If the rebate isn’t reflected, it may indicate issues like incorrect income classification or regime selection. Filing through intelligent systems like TaxBuddy ensures the rebate is applied correctly and flags any mismatches instantly.
Avoiding Scrutiny for Underreported Income in ITR
Tax scrutiny often begins with a mismatch—what you report versus what the system already knows. The Income Tax Department collects data from employers, banks, mutual fund companies, property registrars, and more. This data is compiled into Form 26AS and the Annual Information Statement (AIS). If your return doesn’t align with this, it raises a red flag.
1. Declare All Sources of Income — No Matter How Small
It’s not just salary that needs to be disclosed. Every rupee earned—whether through freelance work, consulting gigs, rent, digital payments, or even occasional side income—must be reported. For instance, earnings from content creation, online tutoring, or affiliate marketing often slip through the cracks. But they are traceable through TDS entries, UPI settlements, or bank inflows.
2. Don’t Overlook Interest from Savings or Fixed Deposits
Many taxpayers assume interest on savings or fixed deposits is too insignificant to declare. However, banks report these to the tax department through Form 26AS. Failing to include them—even when no TDS is deducted—can result in mismatches. Interest from recurring deposits, cooperative banks, and post office savings accounts should also be included.
3. Reconcile With Form 26AS and AIS Before Filing
These two documents are your mirror. Form 26AS gives a snapshot of TDS deducted by employers, banks, or other institutions. AIS offers a broader lens—capturing interest income, mutual fund investments, property transactions, stock trades, and more. Any gap between what you file and what appears here can trigger automated scrutiny. Always cross-verify figures, and if any discrepancy exists, provide clarification in your return or annexures.
4. Don’t Artificially Split or Manipulate Income
Trying to lower taxable income to qualify for Section 87A rebate by spreading income across family members or delaying certain earnings into the next year might appear clever—but the tax department is well-equipped to detect such patterns. Artificial diversions, unexplained bank deposits, or inconsistent reporting invite scrutiny and possible reassessment.
Being transparent, methodical, and accurate is not only essential for tax compliance but also the easiest way to avoid stress later. For added assurance, platforms like TaxBuddy can flag mismatches in real-time and suggest corrections before you hit submit.
Role of Form 26AS and AIS in Preventing Scrutiny
Form 26AS shows the tax deducted and deposited on your behalf, while AIS provides a comprehensive view of income from various sources. Discrepancies between your ITR and these forms can trigger a tax notice. Before filing, match your income with both forms and resolve mismatches early.
TaxBuddy’s Assistance in Accurate Filing and Rebate Calculation
Filing your Income Tax Return isn't just about submitting figures—it’s about making smart choices that reduce liability while staying fully compliant. This is where TaxBuddy steps in, offering a streamlined tax filing experience backed by automation and expert oversight.
One of the most valuable features is regime comparison. TaxBuddy’s platform analyzes your financial details and instantly compares your tax outgo under both the old and new regimes. This ensures that you select the option that yields the lowest liability, especially when it comes to Section 87A eligibility.
Once you’ve selected the regime, TaxBuddy’s AI-driven engine auto-calculates your Section 87A rebate based on the latest income limits, slab rates, and applicable rules. Whether it’s the ₹12,500 rebate under the old regime or the ₹60,000 under the new regime (for FY 2025-26), the system ensures no rebate is missed if you're eligible.
Another major advantage is its automated mismatch detection. Before you submit your ITR, the system cross-verifies your income with entries in Form 26AS and AIS. Any mismatch in reported salary, bank interest, or investment income is flagged, helping you fix discrepancies before they trigger a notice.
For those opting for the old tax regime, the platform also acts as a deduction advisor. It guides you through Sections like 80C, 80D, and 80TTA, helping you identify tax-saving opportunities you might have overlooked, bringing your taxable income below the rebate threshold wherever possible.
By combining smart technology with human expertise, TaxBuddy delivers error-free, compliant, and optimized filing, significantly lowering the chances of scrutiny while maximizing every benefit legally available to you.
What if Income Slightly Exceeds Rebate Threshold?
Even a marginal income above the limit can disqualify you from rebate benefits. However, from FY 2025-26 under the new regime, marginal relief is available. It ensures that the additional tax you pay is not more than the income exceeding the threshold. This softens the blow for taxpayers crossing the ₹12 lakh line by a small margin.
When Section 87A Does Not Apply: Exceptions to Know
Income exceeding rebate thresholds, even by ₹1
Super senior citizens (80+ years)
Non-resident individuals
HUFs, firms, or companies
Tax on long-term capital gains under Section 112A
Knowing these exceptions helps prevent misclaims and notices.
Common Mistakes That Trigger Scrutiny and How to Prevent Them
Ignoring bank interest while calculating income
Declaring only salary income and missing rental/gig/side income
Not verifying income in AIS and Form 26AS
Using incorrect tax regime selection
Submitting ITR without final review
These mistakes can be easily prevented with tools like TaxBuddy that guide you step-by-step.
Conclusion
Claiming the Section 87A rebate can bring your tax liability down to zero, if done right. Choosing the right tax regime, declaring all income sources, and ensuring correct filing are key to maximizing benefits and avoiding scrutiny. For anyone looking for assistance in tax filing, it’s wise to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy provides both options to suit different preferences. Users comfortable with filing their own returns can use the guided self-filing route, which includes intelligent prompts and auto-validation features. Those who prefer professional help can opt for expert-assisted plans, where a CA reviews and files the return, ensuring accuracy and compliance with latest tax laws.
Q2. Which is the best site to file ITR?
While the government portal (incometax.gov.in) is official, platforms like TaxBuddy are considered among the best for ease of use, personalized support, AI-driven calculations, and compliance checks. TaxBuddy not only simplifies the filing process but also helps optimize deductions and apply rebates like Section 87A automatically.
Q3. Where to file an income tax return?
Income tax returns can be filed either on the official government website or via authorized e-return intermediaries like TaxBuddy. TaxBuddy is an ERI (E-Return Intermediary) recognized by the Government of India, offering a secure and user-friendly platform for both salaried and self-employed taxpayers.
Q4. Can I claim Section 87A rebate if my income is ₹7 lakh under the new regime?
Yes. For FY 2024-25 (AY 2025-26), if your taxable income under the new regime is ₹7 lakh or less, you are eligible for a full rebate of ₹25,000 under Section 87A. This rebate reduces your tax liability to zero, provided there are no additional taxable components like long-term capital gains that fall outside the rebate scope.
Q5. What if my income exceeds ₹12 lakh by a small margin in FY 2025-26?
In such cases, marginal relief provisions under the new regime kick in. This ensures the additional tax you pay doesn’t exceed the amount by which your income crosses ₹12 lakh. It's a cushion designed to prevent steep penalties for minor threshold breaches and is auto-adjusted when you use intelligent filing platforms like TaxBuddy.
Q6. Is the rebate under Section 87A automatic in the ITR form?
Yes, the rebate is auto-applied once the eligible income and resident status are confirmed. However, it's still advisable to review the tax computation summary before submission to ensure all income sources are correctly reported and that the rebate has been accurately calculated.
Q7. Can senior citizens claim this rebate?
Resident individuals aged between 60 and 79 are eligible to claim the Section 87A rebate, provided their total taxable income is within the applicable limit. However, super senior citizens (80 years and above) are taxed differently and are not eligible for the rebate under this section.
Q8. Does the rebate apply to capital gains?
The rebate under Section 87A applies to total tax payable on regular income. However, it does not cover long-term capital gains from listed equity shares or equity-oriented mutual funds that are taxed under Section 112A. These gains are treated separately and taxed at a concessional rate, regardless of rebate eligibility.
Q9. Can NRIs claim this rebate?
No. The Section 87A rebate is exclusively available to resident individuals. Non-resident Indians (NRIs) are not entitled to this benefit, even if their income falls within the prescribed threshold. Residency is determined based on the number of days spent in India during the financial year.
Q10. Is it better to choose the old or new regime for 87A?
It depends on your income composition and eligibility for deductions. The old regime allows deductions that can lower taxable income to within the ₹5 lakh limit, making the ₹12,500 rebate applicable. The new regime offers a higher threshold with a flat rebate but without deductions. TaxBuddy helps you compare both instantly and choose the one offering the maximum savings.
Q11. What documents should I keep to avoid scrutiny?
Maintain all documents related to income and deductions: Form 16, Form 26AS, AIS report, interest certificates, rent receipts, LIC premiums, PPF statements, and proofs of medical or education-related expenses. Keep them organized and accessible for at least 6 years from the relevant assessment year.
Q12. What happens if I underreport my income to claim 87A?
Underreporting income, whether intentional or by oversight, can trigger tax scrutiny, penalties, and reassessment. The Income Tax Department cross-verifies your declared income with sources like Form 26AS, AIS, TDS records, and bank data. Filing through verified platforms like TaxBuddy reduces the risk of errors and ensures clean, compliant returns.
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