Tax rebate under section 87A: Here's all you need to know about this 100% relief and who can benefit from it

Finance Minister Piyush Goyal through his interim budget speech on 1 February 2019 warmed the cockles of the middle class by conferring 100 percent income tax rebate under section 87A for those whose total income doesn’t exceed Rs 5 lakh. This will be for the assessment year 2020-21, i.e. relevant for the upcoming financial year 2019-20.

As of now, 100 percent tax rebate under section 87A is on only for individuals whose total income doesn’t exceed Rs 3.5 lakh, subject to a limit of Rs 2,500. To wit, suppose a person gets a salary income of Rs 3.5 lakh during the financial year 2018-19, his tax liability is Rs 5,000—being 5 percent of Rs 1 lakh given the tax exemption limit of Rs 2.5 lakh. But he would have to content himself with a rebate of Rs 2,500.

Things are going to change dramatically. From AY 2020-21, the rebate under this section is going to be given in an ungrudging manner—100 percent without strings or limits, that too for people earning up to Rs 5 lakh. If a person earns Rs 5 lakh during the financial year 2019-20, his entire tax liability of Rs 12,500, i.e. 5 percent of Rs 2.5 lakh would be rebated thus absolving him completely of tax liability.

Senior citizens (80-year-old and above at any time during the financial year) have long been enjoying this privilege which is superficially similar to the one conferred by Piyush Goyal but in truth goes much beyond. They get full tax exemption on their first Rs 5 lakh of income. Period. But if you are younger than them, you would lose the 100 percent tax rebate if you are not able to keep your total income in tight leash, i.e. within the Rs 5 lakh-mark. If it crosses this danger mark, you may have to tap into as many tax saving avenues enumerated under sections bearing the prefix 80.

 Tax rebate under section 87A: Heres all you need to know about this 100% relief and who can benefit from it

Representational image. Reuters

Suppose your income for 2019-20 is Rs 6.50 lakh, you can bring it down to Rs 5 lakh by investing Rs 1.50 lakh under section 80C in a 5-year fixed deposit with a bank. If the income is Rs 8 lakh, then Rs 1.50 lakh under section 80C and another Rs 1.50 lakh under section 80CCC under pension plan of LIC and other approved insurers.

Again health insurance premium on nuclear family upto Rs 25,000 and another Rs 25,000 on parents are also deductible. Thus with a gross total income of Rs 8.50 lakh, it is possible to legitimately bring it down to Rs 5 lakh and thus completely escape tax.

Apart from section 80 deductions, one can also reduce one's taxable income through acquisition of house properties. Hitherto, one could reduce his tax on salary or business income by investing in a self-occupied residential house and pay interest on the loan therefor. An interest up to a maximum of Rs 2 lakh was allowed thus resulting in a maximum loss of Rs 2 lakh which could be set-off against salary or business income as the case may be.

Budget 2019 has, while retaining the limit of Rs 2 lakh, allowed an individual to invest in two self-occupied residential houses. Thus loss from self-occupied houses can also be used as a bulwark to bring down the taxable income to the level of Rs 5 lakh or less.

The above discussion can be summarised as follows:

• Very senior citizens’ income tax exemption threshold itself is Rs 5 lakh. So much so the first slab rate for them is 20 percent when they start earning more than Rs 5 lakh
• Others who do not have a total income exceeding Rs 5 lakh, they get 100 percent tax rebate
• Others who have gross total income in excess of Rs 5 lakh can strive hard through deductions under section 80 as well by booking loss under house property and bring their total income down to Rs 5 lakh and get 100 percent tax rebate; and
• Others who despite their best efforts are unable to bring down their total income to Rs 5 lakh or less will have to pay tax on income in excess of Rs 2.5 lakh.

Let us say the total income of a person is Rs 6 lakh. He will pay tax as follows:

  • On first 2, 50,000, nil
  • On next 2, 50,000, 5 percent, i.e. Rs 12,500
  • On the remaining Rs 1 lakh, 20 percent, i.e. Rs 20,000
    Thus his total tax liability excluding education cess of 4 percent is Rs 32,500.

For a householder, the sage advice to save and invest and avoid tax legitimately is easier said than done. Because from Rs 10 lakh to Rs 5 lakh, the tax-oriented savings/investments have to be in the order of Rs 5 lakh, i.e. 50 percent of one’s income. And if the householder happens to be supporting a very large family, he might not be able to save much in tax-savings avenues.


(The writer is a senior columnist and tweets @smurlidharan)

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Updated Date: Feb 04, 2019 14:20:49 IST