ITR Filing Guide: How to Pay Zero Tax Under New and Old Regimes
As taxpayers prepare for the upcoming filing season, understanding the nuances of tax rebates can be the difference between a heavy tax bill and zero liability. While many confuse the basic exemption limit with tax-free income, the real mechanism for achieving "zero tax" lies in the Section 87A rebate.
Understanding the Section 87A Rebate
The Section 87A rebate is a provision under the Income Tax Act that provides 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.
The amount of relief you receive depends entirely on which tax regime you select. Under the Old Tax Regime, a rebate of up to ₹12,500 is available for those with a taxable income of up to ₹5 lakh. Conversely, the New Tax Regime offers a much more significant benefit, allowing individuals with total income up to ₹12 lakh to claim a rebate of up to ₹60,000, effectively reducing their tax liability to zero.
The New Regime: Higher Limits and Marginal Relief
The New Tax Regime has become increasingly attractive due to its higher rebate threshold. For example, if an individual has a total taxable income of ₹9 lakh, they will not pay any tax despite being above the basic exemption limit of ₹4 lakh, thanks to the Section 87A rebate.
A critical feature of the New Tax Regime is "Marginal Relief." This serves as a safety net for taxpayers whose income slightly exceeds the ₹12 lakh threshold. Marginal relief ensures that the tax payable is not higher than the amount by which the income exceeds ₹12 lakh. This protection is available for total taxable incomes up to ₹12,70,588. If your income rises above this specific limit, marginal relief is no longer applicable, and you must pay the full tax as per the slabs.
Comparative Analysis: Old vs. New Regime
The choice between regimes often depends on your ability to utilize deductions. In the Old Regime, taxpayers can leverage Section 80C deductions (up to ₹1.5 lakh) and other exemptions to bring their taxable income down to the ₹5 lakh mark to claim the ₹12,500 rebate.
In the New Regime, the standard deduction has been increased to ₹75,000, and the path to zero tax is much wider, extending up to a ₹12 lakh income level. However, taxpayers must be cautious: the Section 87A rebate in the New Regime does not apply to income taxed at special rates, such as capital gains or lottery winnings. Similarly, under the Old Regime, the rebate cannot be claimed against long-term capital gains arising from equity shares or equity-oriented funds under Section 112A.
Key Takeaways
- Zero Tax Thresholds: You can achieve zero tax liability under the New Regime with income up to ₹12 lakh (via an ₹60,000 rebate) and under the Old Regime with income up to ₹5 lakh (via a ₹12,500 rebate).
- Marginal Relief Benefit: Under the New Regime, taxpayers earning slightly above ₹12 lakh are protected by marginal relief, provided their total taxable income stays below ₹12,70,588.
- Exclusions Apply: The Section 87A rebate is not applicable to certain special rate incomes, such as specific types of capital gains, in both tax regimes.