Senior citizens can avail of a tax rebate on the total liability before health and education cess under Section 87 (A) of the Income-tax Act, 1961, in both old and new tax regimes. However, this rebate is different from a deduction and an exemption. Let’s find out more.

How Are Exemptions, Deductions, And Rebate Different?

Tax exemptions are the part of income excluded from the gross total income. These expenses are excluded to calculate the taxable income. For example, the house rent allowance (HRA) received as part of the salary is exempt as per a prescribed formula in the income tax rules.

On the other hand, tax deductions are expenses deducted from the taxable income, such as investments under Section 80C, 80D, 80G, 80TTA, and the standard deduction of Rs 50,000. So, these investments or expenses can be deducted from the taxable income to reduce tax liability.

In contrast, a rebate is offered on the tax liability and not the taxable income. Until the financial year 2022-23, the rebate under Section 87(A) was Rs 12,500 in both regimes. Since FY2023-24, it increased to Rs 25,000 in the new regime, with a ceiling of Rs 7 lakh in total taxable income. However, in the old regime, it remained the same up to a taxable income of Rs 5 lakh.

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Who Can Avail Section 87(A) Benefits?

1. A taxpayer should be a resident Indian.

2. The rebate applies to the total tax before adding health and education cess.

3. Senior citizens aged between 60 and 80 are eligible

4. The rebate is allowed only when the taxable income is within the specified limit.

Individuals beyond 80 are not eligible for rebate under this section.

Rebate Under Old Tax Regimes: The rebate will be either the tax payable or the specified amount (Rs 12,500), whichever is lower. The taxable income is limited to Rs 5 lakh.

Rebate Under New Tax Regimes: Since FY2023-24, the limit in the new tax regime has been increased as there are no standard deductions and exemptions allowed in the new regime. The rebate allowed will be either the tax payable or the specified maximum amount of Rs 25,000, whichever is lower, with taxable income up to Rs 7 lakh.

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However, in the new tax regime, there is a slightly higher rebate available if the taxable income is only slightly above the specified Rs 7 lakh. In that case, the rebate will be the difference between tax liability and total taxable income above Rs 7 lakh.

For example, one must pay tax if the taxable income is Rs 7.20 lakh. However, the tax liability will be considered after considering Section 87(A).

The basic exemption limit of Rs 3 lakh is the same for all, including senior citizens, in the new tax regime. The tax liability on an income of Rs 7.20 lakh will be as follows:

1. Up to Rs 3 lakh – basic exemption limit (no tax)

2. For the next Rs 3 lakh – it is Rs 15,000 at a 5 per cent tax rate

3. On the next Rs 1.20 lakh – it is Rs 12,000 at a 10 per cent rate.

So, the total tax liability comes to Rs 15,000 + Rs 12,000 = Rs 27,000. Since the tax liability is more than Rs 20,000, beyond the exempted limit of Rs 7 lakh, one can take a rebate of the difference between the tax liability and taxable income (Rs 27,000-Rs 20,000 = Rs 7,000) and pay only Rs 20,000 instead of Rs 27,000.

Senior citizens are eligible for the benefits under Section 87(A), and they may calculate their taxation in both regimes to find what is suitable for them.