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In Budget 2016, Indian Finance Minister increased the tax rebate under section 87A from 2000INR to 5000INR. The section 87A says following:

The requirement to avail tax rebate u/s 87A

  • Resident Indian
  • The net taxable income <= INR 5 Lakh
  • the tax rebate that can be obtained is 5000 INR or actual tax payabal, whichever is less

If my salary slip says that I will be paying x INR tax this financial year. Then how much minimum investment I need to do to avoid any tax?

I have few doubts:

Q1. Does salary slip considers this rebate amount? In other words, if my salary slip says that company has already cut amount y INR as tax and is yet to cut (x-y), do these figures already consider the ribate u/s 87A? Or can I rephrase this question as "does tax deduction at source considers this rebate u/s 87A"

Q2. Do I have to explicitly specify this claim under 87A in my ITR?

This page says:

b. For salaried employees w.r.t. 87A of Income Tax Act as informed by Income Tax Department (ITD), rebate u/s 87A may be claimed by an Assessee in the Income Tax Return (ITR) only. There is no provision for reporting the same in the TDS/TCS statement. CPC-TDS may generate default for short deduction in case the same is considered for TDS computation but not reported in salary statement Form 24Q.

c. Therefore it's advisable for SALARIED EMPLOYEES to claim rebate through filing Income Tax Return (ITR), even though employer has considered rebate while deducting tax at source (i.e. TDS).

Q3. If above is true, and x is not calculated by considering this rebate amount, should I be making investment of (x-5000) * 10, to avoid any tax. So for example if x = 11000, then I have to do investment of (11000-5000)*10 = 60000 INR instead of 11000*10=110000 INR. Is this calculation correct?

Q4. Will this increment of tax rebate from 2000INR to 5000INR will be applicable immediately this year, that is will I be able to specify it for claim in April 2016 when I fill my ITR. Or will it be old 2000INR only?

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If my salary slip says that I will be paying x INR tax this financial year. Then how much minimum investment I need to do to avoid any tax?

This rebate is not directly linked to investments. If your total Gross is less than Rs 5 lacs, from the total tax computed, you can claim a rebate of upto Rs 5000.

Does salary slip considers this rebate amount?

This depends on the company policy. Companies may already factor in the rebate and deduct less tax. However it is important to claim this when you file the Returns, else it would show up as excess tax. There is no provision in the company form 16 to show this. Further if your taxable income becomes more than Rs 5 lacs, due to say other income, you will not be eligible for this rebate and have to pay tax.

Do I have to explicitly specify this claim under 87A in my ITR?

Yes you have to. If you company has already factored this while deducting tax you will not get any refunds. If the company has not factored this, you will have to claim refund.

If above is true, and x is not calculated by considering this rebate amount,

As indicated, this is not directly linked to investments.

Will this increment of tax rebate from 2000INR to 5000INR will be applicable immediately

This is applicable for financial year 2016-2017 for which you would be filing returns in 2017.

Edit: If you say Gross salary is say Rs 6 lacs. If you invest 1.5 lacs in 80C. Your Net taxable income is Rs 4.5 lacs. The tax on 4.5 lacs Normal individual less than 60 years will be 10% of 2 lacs. i.e. Rs 20,000. You can then claim Rs 5000 as deduction under 87A and pay only Rs 15,000 [20000-15000].

If your Gross salary is say Rs 2.8 lacs. You don't do any investments, your Net taxable income is Rs 2.8 lacs. The tax would be Rs 3000. You can claim rebate under 87A and not pay any tax.

  • I understand this is not directly linked to investment. But if I want more liquidity & thus want to avoid locking-in any extra amount in tax saving investment, then I can plan my investment by taking this rebate in consideration, right? So at least this has some indirect effect on minimum investment need to be done to avoid any tax. (Again 5000 INR is quite small, but to save 5000INR tax in 10% tax slab, I have to do investment of 50000INR. If I am in need of liquidity, then considering this rebate while doing tax saving investment might prove correct, right? ... – Mahesha999 Mar 8 '16 at 14:01
  • ... It might let me keep 50000INR free and not locked in some tax saver scheme) (50000INR is good amout for young one without hefty pay :'p ) Just want to know if above calculations are correct. Can you please tell. – Mahesha999 Mar 8 '16 at 14:01

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