A new section 87A has been introduced in the Budget 2013-14 under Income Tax Act, 1961, which is applicable from 1st April, 2014, wherein an additional relief upto Rs.2,000 has been provided to assessees whose total income is upto Rs.5,00,000 in a financial year. This relief is applicable for individuals only.

The following points must be noted with regard to this section:

1. This is a rebate and not a deduction. This rebate is from the tax and not a deduction from income.
2. Total income under this section cannot exceed Rs.5,00,000. This total income will be after providing for deduction under Chapter VI but before sections 87A.
3. This section can be availed by both male and female assessee.
4. There has been no increase in the basic exemption limit, i.e. it remains to Rs.2,00,000 and not increased to Rs. 2,20,000.
5. Rebate is available on lower of two: Tax payable or Rs.2,000.

To make the understanding of this section more easy following examples can be referred.

Example 1: Mr. A employed with XYZ Pvt. Ltd. drawing a Salary income of Rs. 4,80,000 p.a. Mr. A took life insurance policy paying premium of Rs.50,000 per annum and also had FD of Rs.1,00,000 for 5 years. Compute his tax liability?

1. Total Income                             Rs. 4,80,000
2. Less: Deduction u/s 80C            Rs. 1,00,000
3. Taxable income (a – b)               Rs. 3,80,000
4. Tax @10% on Rs.3,80,000         Rs. 38,000
5. TDS deducted                           Rs. 30,000
6. Less: Rebate u/s 87A                Rs. 2,000
7. Net Tax payable [d – (e + f)]      Rs. 6,000

Example 2: Mr. A employed with XYZ Pvt. Ltd. drawing a Salary income of Rs. 3,20,000 p.a. Mr. A took life insurance policy paying premium of Rs.50,000 per annum and also had FD of Rs.1,00,000 for 5 years. Compute his tax liability?

1. Total Income                             Rs. 3,20,000
2. Less: Deduction u/s 80C            Rs. 1,00,000
3. Taxable income (a – b)               Rs. 2,20,000
4. Tax @10% on Rs.2,20,000         Rs. 2,000
5. TDS deducted                           NIL
6. Less: Rebate u/s 87A                Rs. 2,000
7. Net Tax payable [d – (e + f)]      NIL

Example 3: Mr. A employed with XYZ Pvt. Ltd. drawing a Salary income of Rs. 3,10,000 p.a. Mr. A took life insurance policy paying premium of Rs.50,000 per annum and also had FD of Rs.1,00,000 for 5 years. Compute his tax liability?

1. Total Income                             Rs. 3,10,000
2. Less: Deduction u/s 80C            Rs. 1,00,000
3. Taxable income (a – b)               Rs. 2,10,000
4. Tax @10% on Rs.2,10,000         Rs. 1,000
5. TDS deducted                           NIL
6. Less: Rebate u/s 87A                Rs. 1,000
7. Net Tax payable [d – (e + f)]      NIL

Example 4: Mr. A employed with XYZ Pvt. Ltd. drawing a Salary income of Rs. 3,10,000 p.a. Mr. A took life insurance policy paying premium of Rs.50,000 per annum and also had FD of Rs.1,00,000 for 5 years. Compute his tax liability?

1. Total Income                             Rs. 3,10,000
2. Less: Deduction u/s 80C            Rs. 1,00,000
3. Taxable income (a – b)               Rs. 2,10,000
4. Tax @10% on Rs.2,10,000         Rs. 1,000
5. TDS deducted                           Rs. 2,000
6. Less: Rebate u/s 87A                Rs. 1,000
7. Net Refund [d – (e + f)]              Rs. 2,000

Another point to be noted with regard to this section is that this Tax Rebate of Rs. 2,000/- is also available to a senior citizen, if the total income is Rs. 5 Lakh or less. Effectively, it means, a senior citizen, both male and female, need not pay any tax on total income of upto Rs. 2,70,000/-. However, this benefit is not available to a super senior citizen (age 80 or above) as his total income uptoRs. 5 Lakh is already fully exempted.

This rebate is aimed to give a little relief to those falling in tax bracket of Rs.2 lakhs to Rs.5 lakhs.