How 87A rebase works

The key difference between the two cases is the interest amount. In case 1, the interest amount is Rs.1,00,000, while in Case 2, it is Rs.95,000. This difference affects the total taxable income.

Section 87A Rebate:

The section 87A rebate is a tax rebate available to individual taxpayers whose total taxable income does not exceed Rs.5,00,000. The rebate is calculated as the lower of :

Rs.12,500 (for taxable income upto Rs.5,00,000)

100% of the tax payable

Why 87A Rebate is not applicable in Case 1;

In Case 1, the tax payable is Rs.22,500 + cess, which exceeds the maximum rebate amount of Rs.12,500. Therefore, the 87A rebate is not applicable.

Why 87A Rebate is appliable in case 2:

In Case 2, the tax payable is Rs.20,000, which is less than the maximum rebate amount of Rs.12,500. Since the taxable income is below Rs.5,00,000, the 87A rebate is applicable , and the taxpayer is eligible for a rebate of Rs.2,000.

That is because of maximum marginal relief

In the second scenario, income exceed 7 lacs by Rs.20000/- But tax payable on that works out to Rs.22000/- so the tax payable exceeds income above 7 lacs by 2000.

so 87A restricts the tax payable to the amount by which it exceeds 7 lacs, which is called maximum marginal relief.