The Government provides exemption from Tax to certain Taxpayers whose Income is below the basic exemption limit. Also, in order to provide further relief, the Income Tax law contains Rebate Provisions whereby the Tax concession is granted to the Taxpayers if their Income is above the basic exemption limit but below a certain threshold limit i.e. is Rs. 5 lakhs under the Old Tax Regime, wherein Rebate granted in Rs. 12,500 and the threshold limit in the New Tax Regime stands at Rs. 7 lakhs wherein the Tax Rebate is Rs. 25,000.

The rebate u/s 87A Income Tax Act, 1961. However, the Tax rebate under Section 87A has recently been a hot topic of discussion amongst Tax Experts due to its ineligibility for Special Rate Income. Let’s understand the provision of rebate and what has changed after the Budget 2024.

What is Rebate Under Section 87A of Income Tax Act?

The Rebate under 87A is available for those taxpayers whose income is above the basic exemption limit but below the threshold limit i.e. Rs. 5 lakhs and Rs. 7 lakhs under the Old Regime and New Regime respectively. However, if your Total Income exceeds the above limit, then the benefit of Rebate won’t be available and your entire Income above the basic exemption limit shall be chargeable to tax. Here are the provisions under Section 87A as per the Income Tax Act:

An assessee, being an individual resident in India, whose total income does not exceed five hundred thousand rupees, shall be entitled to a deduction, from the amount of income tax (as computed before allowing the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to hundred per cent of such income-tax or an amount of twelve thousand and five hundred rupees, whichever is less.

The Government inserted a proviso under this section that came into effect from 1st April 2024 as follows:

Provided that where the total income of the assessee is chargeable to tax under sub-section (1A) of section 115BAC, and the total income—

1. does not exceed seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing for the deductions under this Chapter) on his total income with which he is chargeable for any assessment year, of an amount equal to one hundred per cent of such income-tax or an amount of twenty-five thousand rupees, whichever is less;
    
2. exceeds seven hundred thousand rupees and the income-tax payable on such total income exceeds the amount by which the total income is in excess of seven hundred thousand rupees, the assessee shall be entitled to a deduction from the amount of income-tax (as computed before allowing the deductions under this Chapter) on his total income, of an amount equal to the amount by which the income-tax payable on such total income is in excess of the amount by which the total income exceeds seven hundred thousand rupees.

The above proviso has extended the Benefit of Income Tax Rebate by providing the benefit of marginal relief under the New Tax Regime.

Concerns Under Section 87A Post 05.07.2024

However, during the Tax filing season for AY 2024 – 25, the Tax Experts noted that the Income Tax Return filing utilities were not allowing adjustment of Rebate u/s 87A against the Special Rate Incomes after the Changes were made in the Income Tax utility on 05.07.2024. Further, the Special Rate Income basically includes those income for which a Separate Rate of Tax has been provided under the Income Tax Act, 1961. This includes incomes Capital Gains, Winnings from online Games, Lottery Income, Betting Income, Income from Virtual Digital Assets etc.

The concerns of not availing the rebate arose post 05.07.2024 when the benefit was disallowed by the Income Tax Utility even though there were no such prior corresponding amendments made under Section 87A that disallowed the Rebate Benefits against Special Rate Incomes. Representations have also made to the Finance Ministry to rectify this ambiguity. Certain experts state that the disallowance can be attributed to the way the law is being interpreted.

The Law should be clear and unambiguous even as per the Article 265 of the Constitution of India it is evident that "No Tax shall be levied or collected except by authority of Law". However, neither any Notification has been issued nor any prior amendment was made by the Income Tax Department before disallowing the Rebate on Section 87A on Special Rate Income.

Further, even as per the Present Law and its supporting interpretation the Taxpayers should be eligible for the benefit of a Rebate on Tax against both their Normal Income and Special Rate Income if their income does not exceed Rs. 5 lakhs and Rs. 7 lakhs under the Old and New regime respectively.

Resultantly, the present situation is that Taxpayers who have availed the benefit of Rebate u/s 87A on their Special Rate Incomes are now either getting Demand Notice from the Income Tax Department for the Payment of the Tax and the other bracket of Taxpayers who had valid refund to be Credited by the Income Tax Department, the said refund is now being adjusted by the Department up to the extent of the Tax Liability on their Special Rate Incomes. However, any resolution or clarification on this regard is still awaited from the Income Tax Department. 

Also, Check: "Who Shall Obtain Income Tax Clearance Certificate"