Budget Terms Decoded: What is a tax rebate?

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Tax rebate is the amount refunded to a taxpayer on their income tax if the rebate amount set is lesser than the tax they are supposed to pay. The rebate is available on the income tax before adding education and secondary and higher education cess. Only an individual assessee is eligible for this rebate and such an individual should be resident of India.

In Budget 2016, Finance Minister Arun Jaitley announced an increase in tax rebate given for individuals who have a net income equal to or less than Rs 5 lakh. Falling under section 87A of the constitution, the amount of rebate was hiked from Rs 2000 to Rs 5000. This means that under this section, a resident earning upto Rs 5 lakh can either get the full rebate of the income tax they are supposed pay or get Rs 5000, whichever amount is lower.

According to the Finance Minister, this move was expected to provide a tax relief to over 2 crore tax payers.

Currently, for Hindu Undivided Families (HUFs) and an individual below 60 years of age, income up to Rs 2.5 lakh is exempt from tax. From Rs 2.5 lakh to Rs 5 lakh, a tax of 10% is levied income above Rs 5 lakh to Rs 10 lakh is taxed at 20% and a tax of 30% is imposed on income above Rs 10 lakh. A total cess of 3% of the income tax payable is also levied. In an aim to tax the super rich, Jaitley also increased the surcharge on income tax levied on indivuals earning an income of Rs 1 crore or more from 12% to 15%.

To understand how tax rebate works, consider the case where a man earns Rs 4.2 lakh per annum. While his income up to Rs 2.5 lakh will be exempted from tax, the remaining income of Rs 1.7 lakh will be taxed at the rate of 10% since it falls under the tax slab of Rs 2.5 lakh to Rs 5 lakh. Thus, the man will be expected to pay a tax of Rs 17,000. However, since his total income is lower than Rs 5 lakh, he would benefit from a tax rebate according to Section 87A. Since the rebate amount of Rs 5000, announced by Finance Minister Jaitley last year, is lesser than the tax of Rs 17,000 he is supposed to pay, he will get Rs 5000 back.