What is Section 87A and why it’s suddenly everywhere?

TAXBudget 2019 was a landmark event in the history of India. After all rather than just the incremental relaxation in tax brackets, which we are used to seeing, the relaxation this time was doubled from the initial 2.5 Lakhs to 5 Lakhs.

And this evoked ecstasy among the salaried class – 5 Lakhs is probably the average salary range for a majority of Indians. Add to that the complete relaxation one can get even if he/she earns till 6.5 Lakhs, after making tax-related investments under Section 80C of the Income Tax Act.

While this was something everybody understood, something else that inadvertently came up in the mix was Section 87A. Which, understandably so, no one knew about.

Prior to the recent announcement, this section 87A was like a non-existent entity in the Income Tax provisions but the amendment has brought it up to the fore, and suddenly everyone seems to be talking about it.

So What Exactly is Section 87A?

Section 87A, among the many provisions of the Income Tax Act, was introduced by the Finance Act, 2013, to provide tax relief to individual taxpayers. Earlier, the rebate available under Section 87A was a measly 2500, for individuals earning below a specified limit – 3,50,000. Rebate under section 87A will be either 100 percent of income-tax liability or Rs. 2,500, whichever is lower.

To paraphrase, even if your tax liability exceeds Rs. 2,500, the rebate will still be available to the extent of Rs. 2,500 only and zero rebates if the total taxable income exceeds Rs. 3,50,000. This rebate can be claimed at the time of filling of the taxes, before including education cess. It should be noted here that this rebate needs to be subtracted from the total payable tax and not from the total annual income of an individual.

Features of Section 87A

  • Section 87A rebate can only be claimed by individuals. Neither companies nor HUFs can claim rebates under this section.
  • Section 87A rebate is eligible for every individual except super seniors – people above 80 years of age.
  • Similarly, even Non-Resident Indians (NRIs) are barred from claiming rebate under this section. It’s only for Indian residents.

What has changed?

The earlier limit of 3,50,000 has now been upgraded to 5,00,000. This increment in the limit has also increased the rebate from the previous 2,500 to the current 12,500. This will be applicable from the financial year 2019-20. But even with all the changes, the manner in which the rebate was claimed earlier will still be the same; only the rebate amount and the income eligibility criterion will see changes.

This means that going forward, anyone who’s earning an income up to 5,00,000 in a year, under section 87A, will have to pay no-strings-attached zero tax. But that’s not all.

Even if an individual’s annual income stretches to 6,50,000, he/she can take the help of the various tax saving provisions under Section 80 and can again be free from paying any taxes. Apart from this, budget 2019 also introduced a provision for allowing individuals to invest in two self-occupied residential houses. Thus, loss from this can also be used to bring down your taxable income, under section 80.

(Views expressed in this article are a personal opinion of Samant Sikka, Co-founder, Sqrrl.in)

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