ITR Filing: How to Claim Zero Tax Under New and Old Regimes

Understanding the nuances of tax rebates is essential for salaried professionals looking to optimize their take-home pay. While many confuse the basic exemption limit with tax-free income, the real key to paying zero tax lies in the Section 87A rebate.

Understanding the Section 87A Rebate

The Section 87A rebate is a provision designed to provide tax relief to resident individuals whose total income falls below specific thresholds. It is important to note that the rebate is applied after the tax is calculated based on applicable slabs but before the addition of cess. This mechanism effectively wipes out the tax liability for individuals within the prescribed income limits, even if their total income exceeds the basic exemption limit.

Zero Tax Under the New Tax Regime

The new tax regime offers significant relief for middle-income earners. Under this regime, individuals with a total income of up to ₹12 lakh can claim a rebate of up to ₹60,000, resulting in zero tax liability.

For example, if an individual has a gross income of ₹9 lakh, they would technically fall into a taxable bracket because the basic exemption is only ₹4 lakh. However, by applying the Section 87A rebate, the calculated tax is reduced to nil. It is crucial to remember that this rebate does not apply to income taxed at special rates, such as capital gains or winnings from lotteries.

Zero Tax Under the Old Tax Regime

The old tax regime follows a different structure for tax-free thresholds. Here, a rebate of up to ₹12,500 is available for individuals whose total taxable income does not exceed ₹5 lakh. Taxpayers under this regime often utilize deductions like Section 80C (up to ₹1.5 lakh) and the standard deduction to bring their taxable income down to this ₹5 lakh threshold to benefit from the rebate.

Marginal Relief: A Safety Net for Higher Earners

A critical feature of the new tax regime is "marginal relief," which protects taxpayers whose income slightly exceeds the ₹12 lakh threshold. Without marginal relief, a small increase in income could lead to a disproportionately high tax jump.

Marginal relief ensures that if your income exceeds ₹12 lakh, your tax liability is limited to the exact amount by which your income exceeds that limit. This protection is available only if the total taxable income remains below ₹12,70,588. For instance, if the tax calculated is higher than the excess income earned above ₹12 lakh, the tax is capped at that excess amount. However, once income crosses ₹12,70,588, this specific relief is no longer applicable.

Key Takeaways