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What Exactly Is a Tax Rebate for Small Taxpayers?

Updated: Feb 5


What Exactly Is a Tax Rebate for Small Taxpayers?
What Exactly Is a Tax Rebate for Small Taxpayers?

To lessen your tax burden, you can take advantage of several exemptions and deductions on your total taxable income when completing your tax returns. Tax refunds are another way to minimize this sum further.

A tax rebate is simply a claim for compensation that a taxpayer may file concerning his taxable income. One way a taxpayer can significantly lower his overall tax liability is to file for one or more applicable tax rebates.

 

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Stated differently, after each fiscal year, you will receive a refund of tax money if your tax burden is less than the amount you have paid. You have a deadline for filing an income tax rebate if you want a refund of income taxes.

Fortunately, you have many options under the Indian Income Tax Act to lower your income tax. To cut down on your yearly direct tax, you can utilize various tax refunds provided by the law. Just file your income tax return to get the refund. With the country's progressive income tax rates, higher incomes face higher direct taxation. Depending on your tax rate, these rebates can help you save between Rs 12,500 and Rs 1.25 lakh. Most transactions eligible for these rebates involve long-term investments for family security, home, or school expenses.


Tax Rebate for Small Taxpayers

Tax Rebate for Small Taxpayers

With this rebate claim, small taxpayers end up paying ZERO income tax, though they have to file their I-T Returns

From the Assessment Year 2020-21 (the financial year 2019-20), the small individual taxpayers having annual income less than ₹500,000/- are NOT needed to pay any tax though theoretically, you have to pay tax once your income crosses the threshold limit of ₹250,000/-. However, you need not file your income if it’s less than ₹250,000/- but in case it’s less than ₹500,000/- you need to file your I-T Return and claim that you need not pay tax since you are eligible for rebate u/s87A of the Income-tax Act.

What is the Income-tax rebate?

This rebate does not mean that your income is exempt, or your income is deductible for tax purposes. It simply means ‘discount or concession’ in tax. This implies that to claim this rebate you first have to compute your tax on your total taxable income which should be less than ₹500,000/-. Such tax should be computed excluding the amount of any cess therein. Rebate is in respect of tax and not cess. From the assessment year 2020-21 (the financial year 2019-20), the maximum amount of the rebate is ₹12,500/-.

What are the conditions for the rebate claim?

The rebate is available if you satisfy the following conditions:

  1. The rebate is available to only individual taxpayers

  2. The rebate is available only to residents in India

  3. The total income after claiming deductions under chapter VIA (e.g. 80C, 80D, 80DD, 80G, etc.) is less than ₹500,000/-

  4. The maximum limit for the amount of rebate is ₹12,500/- (for A Y 2020-21 and onwards)

  5. The rebate is applied to the tax amount and not to the amount of cess on tax

Claim Rebate

Examples:

Name

Gross Annual Income

Deductions

Total Income

Tax on total income

Rebate

Tax Payable

Shri Ravi

3,80,000/-

1,40,000/-

2,40,000/-

0

0

0

Smt. Mangal

5,20,000/-

1,50,000/-

3,70,000/-

6,000

6,000

0

Shri Satish

6,60,000/-

1,70,000/-

4,90,000/-

12,000

12,000

0

Shri Rajeev

8,20,000/-

1,80,000/-

6,40,000/-

40,500

0

40,500


Deductions and taxable income for small taxpayers

Section 80C: Investment Deductions

Who is eligible to deduct under Section 80C?

  •  HUFs and individuals can both claim the Section 80C deduction.

  What does Section 80C permit for the maximum deduction?

  •  Each year, the taxpayer deducts Rs 1.5 lakh from their total income. The deduction is unavailable to companies, partnership firms, or limited liability companies (LLPs).  

Note: When Sections 80C, 80CCC, and 80CCD (1) are combined, the maximum deduction is Rs 1.5 lakhs. But you can deduct Rs. 50,000 under Section 80CCD (1B).


Section 80E: Interest on Education Loans

Who can make a Section 80E deduction claim?

  • A person may be able to deduct interest from loans for education taken out to pursue higher education.

  •  The taxpayer, their spouse, their children, or a student under their legal guardianship can get an education loan. 

  • IThe 80E deduction is applicable for a maximum of eight years, beginning from when the interest payments start until the total interest amount is paid, whichever happens first.


Benefits and Eligibility Criteria

A significant benefit under Section 87A of the Income-tax Act is that individuals meeting the income threshold can receive a tax rebate. To get this tax refund, file an ITR by the fiscal year's end. However, there might be a few exceptional cases.

1.  You will benefit from filing an ITR if your gross income is less than five lakhs.

2.  You must utilize a tax deduction system covered by Sections 80C, 80D, 80CCD, etc. to lower your payment if your gross income exceeds Rs 5 lakhs.

3.  Individuals earning up to five lakhs in gross income should know they are qualified for a complete tax refund.

The Small Taxpayer Rebate is a tax benefit provided by the Indian government for small businesses. It's a refund for taxpayers who paid less than Rs. 50,000 in taxes in a fiscal year.

The advantages of this rebate include the potential to lower your tax liability and taxable income and offer some tax burden relief.

The purpose of this rebate was to assist Indian small businesses by lowering their tax obligations and fostering business growth.


 Strategies to Leverage Tax Rebates for Small Taxpayers

  •  Create a retirement strategy - Plan for your retirement - When starting your business, make sure to create a clear and timely exit strategy, even if retirement isn't immediate. While your business equity is a valuable part of your net worth, relying solely on your business for retirement might not be the best idea.

  • House office - Most business owners convert their homes into workplaces to save on operational costs. If your home is your main workplace, you can cut down on your taxes by deducting certain expenses like mortgage interest, property taxes, and energy bills. Depreciation is tax-deductible under Section 32, and additional expenses can be deducted under Section 37. This can greatly lessen your tax burden.

By using these methods, you can explore Strategies to leverage these incentives for financial growth.


Stay updated with tax laws and regulations

You can take the following actions to remain informed about new tax laws:

  •  Reading - Regular reading is necessary. Examine business periodicals, financial literature, and other resources.

  • Connect with other tax experts - One of the best ways to maintain your skills is to network with other accounting and tax industry professionals. There are many distinct kinds of opportunities.

Apart from these, you can take advantage of YouTube, where all kinds of information is available. Individuals should regularly check the official website and read the notifications released by the Ministry daily.


Leverage Deductions and Credits

If a tax credit is refundable, the amount of the credit that exceeds your taxable income will be returned to you.

Conversely, deductions are taken out of your income. Applying your top marginal tax bracket percentage to the deduction amount yields the tax savings from the deduction. You will save more money on taxes with the credit than a deduction if your marginal tax rate is lower than the percentage credit allowance.

However, you would gain more from a deduction if your marginal tax rate exceeded the credit percentage. The amount of money you save on taxes depends on your income and the top marginal tax bracket.


Seek Professional Advice

Small taxpayers stand to gain a great deal from efficiently utilizing tax rebates. Remember local tax rules and unique situations that can affect tax methods. Consulting with an accountant or tax expert might offer customized assistance. The following are some generic approaches to think about:

  • Consider tax-efficient investments - Certain assets, such as certain municipal bonds or tax-managed funds, give tax benefits. Speak with a financial counselor to learn about investing possibilities that suit your tax circumstances.

  • Arrange your charity donations. You may be eligible to deduct your taxes from gifts to approved charities. Plan your charity donations carefully to get the most out of the tax advantages.


Explore Tax-Friendly Investments

After you retire, the balance will be paid to you as an NPS account holder as a monthly pension. You can invest in NPS between the ages of 18 and 60. It is simple to invest in and has inexpensive fund management fees. Three distinct asset classes are invested in: government securities, corporate bonds, and equity. It offers a risk-diversified investment.

Any NPS subscriber may claim a tax benefit under Section 80 CCD (1) up to the maximum amount of Rs. 1.5 lac allowed under Section 80CCC. For investments up to Rs. 50,000 in an NPS (Tier I account), NPS subscribers are the only ones eligible for an additional deduction under Section 80CCD (1B). This is in addition to the Rs. 1.5 lakh deduction allowed by the Income Tax Act of 1961, Section 80C.


Maintain Accurate Records

Maintaining comprehensive records for the entire year is one of the easiest ways to guarantee successful tax returns. Failing to do so could result in a departmental investigation or possibly an inquiry, among other consequences. Records must substantiate the income, tax credit, and deductions reported on your tax return up until the statute of limitations, or the legally mandated time frame during which taxpayers must keep their books of account current, expires. Maintaining the filed copies of the tax returns is also necessary because they are helpful for upcoming tax filings. Using accounting software, which can track all of the revenue and expenses for the company, is a helpful method of maintaining records.


Filing taxes using the presumptive taxation scheme

The following are the steps to calculate income under the Presumptive Taxation Scheme:

  • Section 44AD: When cash receipts are received during the fiscal year, the income from the qualified business is presumed to be at least 8% of the business's turnover or gross receipts. However, the income is assumed to be 6% instead of 8% for transactions where the business accepts digital payments through bank drafts, electronic clearing systems, or checks.

  •  Section 44 DA: At least 50% of the total gross receipts from the profession are presumed to come from the profession's income.

  •  Section 44AE: For each month or portion, the income from the transport business is assumed to be ₹1,000 per ton of gross vehicle weight for heavy goods vehicles and ₹7,500 for other vehicles.

  •  No additional deductions or costs for the business, profession, or income are permitted; the income calculated using the fixed rate is the final income.

  •  If the taxpayer desires, they may report an income that exceeds the fixed rate.

 

FAQ’s

1. What makes an income of 7.5 lakhs tax-exempt?

The standard deduction was previously exclusive to the previous income tax system. Amounts up to Rs 7.5 lakh will be exempt from taxation for salaried individuals, pensioners, and family pensioners due to deductions, rebates, and adjustments to income tax slabs announced in the Budget 2023.


2. What is the allowable deduction for a taxpayer?

The deduction is restricted to the entire amount deposited or paid, up to a maximum of Rs. 1,50,000. The total amount of the deductions allowed under sections 80C, 80CCC, and 80CCD is limited to Rs. 1,50,000.


3. What is the minimum deduction for tax from a salary?

The standard deduction is a one-time, flat deduction from your taxable income under the head salary of Rs. 50,000/-. It is possible to claim this tax benefit regardless of the actual amount spent on medical and transportation allowances.


4 What is the permissible deduction under income tax regulations?

Under Section 80C of the Income Tax Act, individuals can receive tax deductions for payments made toward life insurance policies, fixed deposits, superannuation or provident funds, tuition fees, and the construction or purchase of residential properties.


5. Why is the income of 7 lakhs tax-free?

Starting April 1, the new tax system exempts taxpayers from paying taxes if their annual income is over Rs 7 lakh.


6. What tax bracket will be the lowest in 2023?

Income up to Rs. 3,00,000 has an NIL rate of Tax.


7. How much of your salary is subject to TDS?

10% of the overall income, up to a maximum of Rs. 2,50,000. Under Section 192, the employer must withhold tax at source from the amount owed at the average income tax rate. The rates in effect for the financial year the payment must be used to compute this.


8. Does NPS have a tax exemption?

Any NPS subscriber may claim a tax benefit under Section 80 CCD (1) up to the maximum amount of Rs. 1.5 lac allowed under Section 80 CCE. For investments up to Rs. 50,000 in an NPS (Tier I account), NPS subscribers are the only ones eligible for an additional deduction under subsection 80CCD (1B).


9. To what extent is NPS tax-free?

No taxes apply to withdrawing up to 60% of the total corpus in a lump sum. For example, if your total corpus at exit is 10 lakhs, you can take out 60% (6 lakhs) without any tax.

10. Which taxes do small businesses have to pay? 

Regarding small businesses, if their annual turnover is 250 crore rupees or less, they must pay tax at a rate of 25%.


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