A detailed guide on income tax rebate

Income Tax Rebate: What is rebate in income tax?

Income tax rebate is a benefit provided by the government to taxpayers that allows them to reduce their total tax liability. It is the reduction in the amount of tax to the taxpayers by the government in order to promote savings and investment. In India, income tax rebates play a crucial role in providing substantial relief to taxpayers, particularly those belonging to the middle-income segment. A tax rebate essentially entails a reduction in the tax amount that individuals are required to pay. It serves as an incentive offered by the government to encourage savings and is specifically outlined in Section 237 of the Income Tax Act. By implementing tax rebates, the government aims to promote a culture of savings and financial security among taxpayers.

The Income Tax Act, 1961, governs the provisions for income tax rebates in India. According to this Act, tax rebates are available for specific investments and expenditures made by taxpayers (under the old tax regime). The amount of rebate you can claim varies depending on the nature of the investment or expenditure.

How to claim income tax rebate in FY 2024-25

To claim income tax rebate in India, follow these steps:

Determine eligibility

Check if you meet the eligibility criteria for claiming an income tax rebate. Rebates are typically available for specific categories such as senior citizens, individuals with certain disabilities, or taxpayers in specific income brackets. Make sure you meet the criteria specified by the Department of the Income Tax.

Calculate taxable income

Calculate your total taxable income by considering all sources of income, including salary, business profits, capital gains, and other applicable income. Deduct eligible deductions and exemptions to arrive at the final taxable income amount.

Identify the rebate section

Identify the relevant section under which you can claim the income tax rebate. The specific section depends on the nature of the rebate you are eligible for. Common rebate sections include Section 87A (for individuals with lower income) and Section 80C (for certain investments and expenses).

Gather necessary documents

Collect all supporting documents required to claim the rebate. This may include investment proofs, certificates, receipts, and other relevant documents as per the rebate section you are claiming.

File income tax return

Prepare and file your income tax return using the appropriate forms (such as ITR-1, ITR-2, etc.) based on your income sources. Ensure you accurately report your income, deductions, and claim the rebate under the appropriate section.

Verify and submit

Review your income tax return for accuracy and completeness. Make sure all necessary details, including the rebate claim, are correctly entered. Once satisfied, submit your income tax return either electronically through the income tax e-filing portal or physically by mailing it to the designated Income Tax Office.

It is recommended to consult a tax professional or chartered accountant for personalized guidance and assistance in claiming income tax rebates based on your specific financial situation and eligibility.

Types of Income Tax Rebate

There are several types of income tax rebates available in India. Here are some common types:

1. Section 87A: This rebate is available for individuals with lower income. As per Section 87A of the Income Tax Act, if the total income of an individual does not exceed a certain threshold (currently Rs. 5 lakh), they are eligible for a rebate of up to Rs. 12,500.
2. Section 80C: Under Section 80C, individuals can claim a rebate on investments made in specified financial instruments. This includes investments in instruments like Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificates (NSC), tax-saving fixed deposits, equity-linked saving schemes (ELSS), and life insurance premium payments. The maximum rebate allowed under this section is Rs. 1.5 lakh.
3. Section 80D: This rebate is available for payments made towards health insurance premiums. Under Section 80D, individuals can claim a rebate on premiums paid for health insurance policies for themselves, their spouse, children, and parents. The maximum rebate amount varies depending on the age of the insured and the coverage opted for.
4. Section 24(b): This rebate is related to home loan interest payments. Under Section 24(b), individuals can claim a rebate on the interest paid on home loan repayments. The maximum rebate allowed is Rs. 2 lakh per financial year.
5. Section 80E: This rebate is applicable to individuals repaying education loans. Under Section 80E, individuals can claim a rebate on the interest paid on education loans for higher studies. The entire interest amount paid can be claimed as a deduction for a maximum of 8 years.
6. Section 80G: This rebate is available for donations made to specified charitable organizations. Under Section 80G, individuals can claim a rebate on the donations made to eligible charitable institutions. The rebate percentage varies depending on the organization and is subject to certain limits.

These are just a few examples of the income tax rebates available in India. It is essential to review the specific provisions, eligibility criteria, and limitations for each rebate section before claiming them. Consulting a tax professional or chartered accountant can provide personalized guidance and assistance based on individual circumstances.

Introduction of the new tax regime (Budget 2023)

India has seen a significant change in the tax regime with the budget 2023. The new tax regime offers taxpayers an alternative to the existing tax system, which has been in place for years. The new regime comes with a simplified tax structure and offers more significant tax savings. However, it also means that taxpayers must give up exemptions and deductions available under the old tax regime.

The new tax regime will be the default option while filing your taxes and will come into effect from April 1, 2023. Salaried employees, however, can switch between old and new tax regimes while filing their tax returns. Others can only switch back to the old tax regime once in their lifetime.

To understand the changes, it is essential to know the difference between the two tax regimes.

Income	Tax Rate in the New Tax Regime	Income	Tax Rate in the Old Tax Regime
Up to Rs. 3 lakh	Nil	Up to Rs. 2.5 lakh	Nil
From Rs. 3 lakh - Rs. 6 lakh	5.00%	From Rs. 2.5 lakh - Rs. 5 lakh	5.00%
From Rs. 6 lakh - Rs. 9 lakh	Rs. 15,000 + 10% above Rs. 6 lakh	From Rs. 5 lakh - Rs. 10 lakh	Rs. 12,500 + 20% above Rs. 5 lakh
From Rs. 9 lakh - Rs. 12 lakh	Rs. 45,000 + 15% above Rs. 9 lakh	Above Rs. 10 lakh	Rs. 1,12,500 + 30% above Rs. 10 lakh
From Rs. 12 lakh - Rs. 15 lakh	Rs. 90,000 + 20% above Rs. 12 lakh
Above Rs. 15 lakh	Rs. 1.5 lakh + 30% above Rs. 15 lakh

Note: Cess of 4% will be levied on the income tax amount. For incomes above Rs. 50 lakh, surcharges will be levied.

**In the new tax regime, you will not have to pay taxes if you earn less than Rs. 7 lakh post deductions under section 87-A. The above tax slabs apply only to salaried individuals who earn more than Rs. 7 lakh post deductions.

The old tax regime provides various exemptions and deductions, such as tax breaks on home loans, insurance premiums, and investments in specific financial instruments.

On the other hand, the new tax regime removes most of the exemptions and deductions available under the old tax regime. However, it still allows exemptions such as the standard deduction.

The new regime is a significant shift from the old tax regime. It offers taxpayers the choice to either stay with the old tax regime or opt for the new one. If taxpayers choose the new tax regime, they will have to forego most of the exemptions and income tax deductions available under the old tax regime.

Benefits of choosing the new tax regime

• Reduced tax rate
  One of the most significant advantages of the new tax regime is the reduced tax rate. Taxpayers who opt for the new tax regime will pay lower taxes than they would under the old tax regime. For example, a taxpayer earning between Rs. 5-7.5 lakh (post deductions) would pay 20% tax under the old tax regime. However, under the new tax regime, they would pay 0% tax, resulting in significant savings (Rs. 50,000 can be removed from taxable income as standard deduction).
• Simplified tax structure
  Another advantage of the new tax regime is the simplified tax structure. Additionally, taxpayers who opt for the new regime will not have to keep track of various income tax deductions and exemptions, making the tax filing process easier.

Disadvantages of choosing the new tax regime

• No exemptions or deductions
  The new tax regime comes with its own set of disadvantages. One of the significant drawbacks is the loss of various exemptions and deductions available under the old tax regime. Taxpayers who opt for the new regime cannot claim tax benefits for investments in various financial instruments such as Public Provident Fund (PPF), National Savings Certificate (NSC), or home loans.
• Not beneficial for those with significant investments

Another disadvantage of the new tax regime is that it is unsuitable for taxpayers with significant investments or multiple income sources. The old tax regime may be more beneficial for such taxpayers, as it provides more significant tax benefits.

Income tax rebates – Old tax regime vs. new tax regime

Rebates under the old tax regime

Under the old tax regime, there are several ways to get tax rebates in India.

Section 80C of the Income Tax Act

One of the most common ways is by investing in tax-saving instruments. These include investments in PPF, NSC, Equity-Linked Savings Scheme (ELSS), and Unit Linked Insurance Plan (ULIP), among others. Investments in these instruments are eligible for income tax deductions under Section 80C of the IT Act. This can reduce the taxpayer's taxable income and provide a rebate on the tax payable. Additionally, you can claim a deduction on the principal amount for a home loan. The combined deduction limit u/s 80C is Rs. 1.5 lakh.

Sections 80D and 80DDB

Another way to get tax rebates is by investing in a health insurance policy or medical treatment. Premiums paid towards health insurance policies are eligible for tax deductions under Section 80D of the IT Act. Additionally, expenses incurred towards medical treatment of self or dependants are eligible for tax deductions of Rs. 40,000 (non-senior citizens) under Section 80DDB.

Section 80G

The government also provides tax rebates to encourage donations to charitable institutions. Donations made to recognised charities or institutions are eligible for tax deductions under Section 80G of the IT Act. The amount of rebate varies depending on the type of donation made.

Rebates under the new tax regime

If you opt for the new tax regime, you must forego 70 tax exemptions and deductions. You can only claim deductions u/s 24 for let-out properties, a Standard Deduction of Rs. 50,000, and a deduction under section 80CCD (2).

Additionally, under the new tax regime, you can avail a tax rebate of Rs. 25,000. However, it only applies to individuals whose annual income does not exceed Rs. 7 lakh after deductions.

The government has also announced a hike in the basic tax exemption limit, increasing it to Rs. 3 lakh from the previous Rs. 2.5 lakh.

How do you calculate tax rebates?

To calculate tax rebates:

1. Determine taxable income: Calculate the income subject to taxation by subtracting exemptions and deductions from the gross income.
2. Exemptions: Identify income items that are exempt from tax, such as interest earned on tax-saving instruments.
3. Deductions: Consider eligible expenses or investments that qualify for tax deductions, such as those mentioned above.
4. Calculate tax payable: Use the applicable tax slab rates to determine the amount of tax owed based on the taxable income.
5. Claim tax rebates: Under the relevant sections of the Income Tax Act, claim tax rebates for investments and expenses made.
6. Deduct tax rebate: Subtract the tax rebate amount from the tax payable to arrive at the final tax liability.
   

Particulars (in Rs.)	Old Tax Regime	New Tax Regime
Annual Salary (After Standard Deduction)	7 lakh	7 lakh
Section 80C Rebate/Deduction	Rs. 1.5 lakh	Nil
Gross Taxable Income (GTI)	Rs. 5.5 lakh	Rs. 7 lakh
Tax Slab Rate	0.2	0.1
Tax on GTI (A)	Rs. 22,500	Rs. 25,000
Section 87-A Rebate	Nil	Rs. 25,000
4% Cess on A	Rs. 900	Nil
Total Tax	Rs. 23,400	Nil
Net Income Tax payment	Rs. 25,000	Rs. 3,000
Minimum Income Tax Refund	Rs. 1,600	Rs. 3,000

It is essential to note that income tax rebates differ from tax exemptions. Tax exemptions are income items entirely exempted from tax, such as agricultural income or income earned by diplomatic missions. Tax rebates are provided for specific investments and expenses made by taxpayers and can help reduce taxable income and tax liability.

Key points to remember

• Under the old tax regime, you can claim income tax deductions under Section 80C, 80EE, 80EEA and 24(b) on home loans.
• If you opt for the new tax regime, the maximum income tax rebate you can claim under Section 87-A is Rs. 25,000.
• If you do not qualify under Section 87-A, you are liable to pay tax as per your income tax slab.
• If you have not invested in tax-saving instruments or taken a home loan, you should opt for the new tax regime.

However, you will benefit from the old tax regime if you have taken a home loan. You can enjoy deductions of up to Rs. 2 lakh u/s 24 (b) on the interest paid on a home loan. Additionally, you can get deductions of up to Rs. 1.5 lakh on the principal amount u/s 80C. You can claim a deduction of up to Rs. 50,000 under Section 80EE and a deduction of up to Rs. 1.5 lakh under Section 80EEA against interest paid on the home loan.

Difference between income tax exemption and income tax deduction

Both income tax exemption and income tax deduction offer ways to reduce your taxable income, but they work differently and have distinct implications for your tax liability.

Income tax exemption:

• Definition: Income tax exemption means that certain types of income are not subject to tax at all. It's like getting a pass on paying taxes for that particular income.
• Nature: It's a direct relief from paying tax on specified income sources. For instance, interest earned on Public Provident Fund (PPF) is exempt from income tax.
• Impact: Exempt income reduces your total taxable income, leading to lower tax liability. This is beneficial as you're not taxed on this income at all.

Income tax deduction:

• Definition: Income tax deduction allows you to subtract a certain amount from your total taxable income. It doesn't exempt the income but reduces the amount on which tax is calculated.
• Nature: Deductions are amounts that you can subtract from your total income, like deductions under Section 80C for investments in specified instruments.
• Impact: Deductions reduce your taxable income, which in turn lowers the amount of tax you owe. For instance, if you have a deduction of Rs. 1.5 lakh under Section 80C, you can reduce your taxable income by this amount.

When it comes to home loans, understanding these concepts is crucial for maximising tax savings. Both exemptions and deductions play a role in reducing the tax burden for home loan borrowers. For instance, the interest paid on a home loan is eligible for deduction under Section 24, and the principal repayment qualifies for deduction under Section 80C. To learn more about home loan tax benefits, you can visit home loan tax benefits.

Which tax regime is better?

The old and new tax regimes have their own set of advantages and disadvantages. The choice of tax regime depends on the individual taxpayer's financial situation and investment goals.

You may find the new tax regime more beneficial if you want to save on taxes without worrying about various exemptions and deductions. However, those with significant investments or multiple sources of income may find the old tax regime more suitable.