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The government has not changed the basic exemption limit of 2.50 lakh for some time as the government does not want people to go out of the tax net and be exempt from filing ITR. However, at the same time the successive governments have proposed rebate from taxes for taxpayers up to certain income limit. Presently the rebate of tax is available for those whose income does not exceed 5 lakh. This rebate is available under Section 87A. Let us discuss how it works for you.

What is the exact provision?

Section 87A was introduced in Finance Act 2003 which was changed from time to time. Presently an individual tax payer, who is resident of India for income tax purpose, is entitled to claim tax rebate up to Rs. 12,500 against his tax liability if your income does not exceed 5 lakh. However, your entitlement to claim the rebate under Section 87A gets lost altogether once the income exceeds this limit.

Anybody and everybody is not entitled to avail this rebate. Though the basic exemption limit of Rs. 2.50 lakh is applicable for all Individuals and HUFs whether resident or non-resident but the rebate under Section 87A is available only to an individual and that too only if he is resident for income tax purposes. So all the HUFs and non resident individuals are not entitled for this rebate.

Which income is to be taken into account for the eligibility criteria

There has always been confusion in the minds of taxpayers as to which income is to be considered for the purpose of being eligible for this rebate. It is the income on which your ultimate tax liability is computed. So to start with, the income to be considered for this purpose is the income arrived at after setting off all the brought forward old losses against the income of current year. Likewise, from the net income after such set off of losses, you have to reduce all the available deduction under various sections of Chapter VIA. Chapter VIA contains deductions for various items under sections like: Section 80C (For LIP, EPF, PPF, ELSS, tuition fee, home loan repayment etc.), Section 80 CCD (NPS), Section 80 D (Health Insurance), 80 G (donations) and 80 TTA and 80TTB (Bank interest).

Against which tax liability this rebate can be adjusted and cannot be adjusted

It is not that the rebate up to Rs. 12,500 available under Section 87A can be claimed against tax liability of any nature. This rebate can be claimed against your tax liability in respect of normal income which is taxed at the slab rate, long term capital gains under Section 112. (Section 112 applies for long term capital gains on sale of any capital assets other than listed equity shares as well as equity oriented schemes of mutual funds.) This rebate is also available against your tax liability for short term capital gains on listed equity shares as well as equity oriented schemes of mutual funds under Section 111A on which tax is payable at flat rate of 15%.

Please note, you are not entitled to set off your tax liability in respect of long term capital gains under Section 112A arising on sale of listed equity shares as well as equity oriented schemes of mutual funds, which is payable 10% after initial exemption of Rs. 1 lakh.

How the rebate actually works

People are generally under the impression that in case their income does not exceed the magic number of 5 lakh, he does not have to pay any tax. This is because for normal income the tax rate between 2.50 lakhs and 5 lakhs is 5% and the tax liability at 5% on 2.50 lakhs comes to exactly 12,500. However in case your income comprises of income which are taxed at higher rate of 15% (being Short term capital gains) or 20% (being other long term capital gains), you will have to still pay some tax even if your income does not exceed five lakhs. For your income of 5 lakh comprises of one lakhs of short term capital gains on listed shares of one lakhs and balance is your regular income. You tax liability would be Rs. 22,500, comprised of Rs. 7,500( 5% on 1.50 lakh)+15,000 (15% on 1 lakhs of Short term capital gain). After rebate of 12500/- you will have to pay Rs. 10,000/- and cess even when your income does not exceed the threshold of five lakhs.

Writer is tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on twitter

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