Analysis of Section 87A and 115BAC(1A) of Income Tax Act, 1961

With the recent changes in the utility of Income Tax returns, a significant focus has been placed on Sections 87A and 115BAC(1A) of the Income Tax Act, 1961. Understanding these sections and their implications on taxpayers has become crucial. Section 87A provides a rebate for resident individuals, reducing their tax liability if their total income does not exceed a specified limit. Meanwhile, Section 115BAC(1A) introduces an optional new tax regime with lower tax rates but restrictions on exemptions and deductions. This analysis delves into these sections, exploring their key features and interactions, to help taxpayers navigate the complexities of the Income Tax Act.

Section 87A: Rebate for Resident Individuals

Section 87A provides a rebate for resident individuals whose total income does not exceed a specified limit. This rebate effectively reduces the tax liability of eligible taxpayers.

Key Points:

• Eligibility: Only resident individuals are eligible for this rebate.
• Total Income Threshold: The rebate is applicable if the total income of the individual does not exceed the specified limit for the relevant financial year.
• Rebate Amount: The amount of the rebate is the lower of the actual tax payable or the prescribed limit under this section.

“Total Income” under the Proviso of Section 87A

There has been a recent discussion on the interpretation of “Total Income” as per the proviso of Section 87A. The Income Tax Department is considering for the purpose of Proviso of section 87A, “Total Income” refers to the normal income and excludes income that is subject to tax at special rates.

But, as per section 2(45) of Income Tax Act, 1961 “total income” means the total amount of income referred to in section 5, computed in the manner laid down in this Act.

Section 5 of the Income Tax Act: This section defines the scope of total income for a resident, it includes all income from any source inside or outside India.

Normal Income vs. Income Taxed at Special Rates:

• Normal Income: This typically includes income from salary, house property, business or profession, capital gains (taxed at regular rates), and other sources such as interest and dividends (taxed at normal slab rates).
• Income Taxed at Special Rates: Certain types of income are taxed at special rates, such as short-term capital gains under Section 111A, long-term capital gains under Section 112A, and winnings from lotteries, games, etc.

By this interpretation, the rebate under Section 87A for “new tax regime” would apply to the total income after excluding incomes taxed at special rates. This distinction ensures that the rebate is available only on the income taxed under the regular rates applicable to the individual.

Section 115BAC(1A): New Tax Regime

Section 115BAC(1A) introduces an alternative tax regime with lower tax rates, subject to certain conditions and restrictions on exemptions and deductions.

Key Features:

• Optional Regime: Taxpayers have the option to choose this new tax regime over the existing one.
• Reduced Tax Rates: The new regime offers lower tax rates across various income slabs.
• Restrictions on Exemptions and Deductions: Taxpayers opting for this regime need to forgo most exemptions and deductions available under the old regime.

Interaction between Sections 87A and 115BAC(1A)

When opting for the new tax regime under Section 115BAC(1A), taxpayers need to understand how the rebate under Section 87A will be applied. If the interpretation that “Total Income” excludes income taxed at special rates is upheld, then:

• Taxpayers under the new regime will compute their total income as per the conditions laid out in Section 115BAC(1A).
• They will then apply the rebate under Section 87A on the total income, excluding any special rate income, to determine their final tax liability.

Conclusion

The ongoing discussions and potential clarifications by the Income Tax Department on the definition of “Total Income” under Section 87A are crucial.

Income Tax Department should ensure a clear understanding of how rebate and new tax regime interact. It would be helpful to taxpayers in making appropriate decisions regarding their tax filings.