The announcement of enhanced tax benefits under the new tax regime has created a common belief that individuals earning up to ₹12 lakh annually do not need to pay any income tax. While this is largely true due to the rebate available under Section 87A, many taxpayers are surprised when they receive a tax demand despite having income below this threshold.
Understanding the difference between Section 87A and Section 156 of the Income-tax Act is essential to avoid confusion and unexpected tax liabilities.
Page Contents
What is Section 87A Rebate?
Section 87A provides tax relief to resident individuals whose total taxable income falls within the prescribed limit. Under the new tax regime, eligible taxpayers can claim a rebate that effectively reduces their tax liability to zero up to the specified income threshold.
The rebate is available only after calculating the income tax payable and is subject to conditions prescribed under the Income-tax Act.
The primary objective of Section 87A is to reduce the tax burden on middle-income earners and simplify tax compliance.
Why Do Taxpayers Think Income Below ₹12 Lakh is Completely Tax-Free?
Recent budget announcements and media reports highlighted that individuals with taxable income up to ₹12 lakh under the new tax regime may not have to pay income tax because of the rebate.
However, many taxpayers overlook the fact that the rebate applies only to the income tax component and not necessarily to every type of liability that may arise during assessment or processing of returns.
This distinction becomes important when notices or demands are issued by the Income Tax Department.
Understanding Section 156 – Notice of Demand
Section 156 empowers the Income Tax Department to issue a Notice of Demand whenever any tax, interest, penalty, fee, or other sum is payable by a taxpayer under the provisions of the Income-tax Act.
A demand notice may arise due to:
- Short payment of self-assessment tax
- Mismatch in TDS or TCS credits
- Interest under Sections 234A, 234B, or 234C
- Errors in return filing
- Additional tax liability determined during assessment
- Penalties or fees levied under various provisions
Once a notice under Section 156 is issued, the taxpayer is generally required to pay the amount within the specified time.
Why Can Tax Still Be Payable Below ₹12 Lakh?
Many taxpayers assume that the Section 87A rebate eliminates all liabilities. In reality, the rebate only reduces the income tax amount. Certain liabilities may still remain payable.
1. Interest Liability: Even if income tax becomes zero after claiming rebate, interest for delayed filing of return, delayed payment of tax, or default in advance tax obligations may still apply. Such interest is not always covered by the rebate provisions.
2. Mismatch in Income Reporting: If income reported in the return differs from information available with the department through Form 26AS, AIS, or TIS, an additional tax demand may be raised. In such cases, the rebate may not fully offset the revised liability.
3. Ineligible Rebate Claim: Some taxpayers incorrectly claim the rebate despite not meeting eligibility conditions. During processing, the department may disallow the rebate and raise a demand.
4. Capital Gains and Special Rate Income: Certain categories of income such as specific capital gains may be taxed at special rates. Depending on applicable provisions and assessment year rules, rebate benefits may be restricted or unavailable for such income.
5. Penalties and Fees: Late filing fees under Section 234F or penalties imposed under the Act are separate liabilities. These are not waived merely because income falls below ₹12 lakh.
Practical Example
Suppose a taxpayer earns ₹11.5 lakh under the new tax regime and claims the Section 87A rebate, reducing income tax liability to zero.
However:
- The return is filed after the due date.
- Interest becomes payable for delayed compliance.
- A late filing fee is levied.
In this case, although the income tax itself may be nil, the taxpayer may still receive a demand notice under Section 156 for the interest and fee amount.
What Should Taxpayers Do?
To avoid unexpected tax demands:
- File income tax returns within the due date.
- Verify Form 26AS, AIS, and TIS before filing.
- Ensure correct reporting of all income sources.
- Check eligibility conditions before claiming Section 87A rebate.
- Review intimation received under Section 143(1).
- Respond promptly to any demand notice issued by the department.
Conclusion
The enhanced rebate under Section 87A provides significant relief to taxpayers and can reduce income tax liability to nil for eligible individuals. However, taxpayers should not assume that income below ₹12 lakh automatically eliminates every possible tax-related obligation.
Section 156 allows the Income Tax Department to recover tax, interest, penalties, and other dues that may arise even when the rebate under Section 87A is available. Understanding this distinction can help taxpayers avoid surprises, maintain compliance, and ensure smooth tax filing.
As always, careful return preparation and timely compliance remain the best safeguards against unnecessary tax demands.
Author Bio
