In the 2019 interim Budget, income tax rebate under Section 87A of Income tax Act was increased to ₹12,500, from ₹2,500. This tax rebate is applicable for individuals who have a taxable income of less than ₹5 lakh. The amount of rebate is 100% of income tax payable on the total taxable income of up to ₹5 lakh. Total taxable income or net taxable income is the income after taking into account deductions.

Though there are expectations that the Finance Minister Nirmala Sitharaman could announce more tax sops in the Budget, due on Friday, higher income tax rebate announced earlier helps individuals with income up to ₹7-8 lakh are likely to gain from the benefit. For this financial year, assessees with taxable income of up to ₹5 lakh this financial year can claim the entire tax payable as tax rebate.

But it is to be noted that assessees still need to file their income tax returns as this is not an exemption.

The math is simple. For instance, if an assessee has a gross income of ₹7.5 lakh for the financial year 2019-20, and makes an investment of ₹1.5 lakh under Section 80C and ₹50,000 in NPS under Section 80CCD(1B), his net taxable income after factoring in the standard deduction of ₹50,000 comes down to₹5 lakh. The tax liability would be ₹12,500 (5% of ₹2.5 lakh) excluding cess. However, as his taxable income is up to ₹5 lakh, he is liable to claim a rebate of ₹12,500 and thus his net tax payable would be zero.

But this income tax rebate is only applicable for individuals who have a taxable income of less than ₹5 lakh. Even a marginal increase beyond this limit attracts tax liability. For example, an assessee with taxable income of ₹5,00,010 (including ₹50,000 standard deduction) will have to pay income tax of ₹13,002 (including cess).

Tax experts say that assesses should take benefit of the this income tax rebate to the extent possible as the tax liability come down to zero.