Most of us would be knowing about and have been claiming a rebate under section 87A of Income Tax Act, 1961. But very few of us would be fully aware about the controversial implications of new drafted proviso (b) to this section which is effective from AY 2024-25.

Let’s see the Section 87A of Income Tax Act, 1961 first. 

Rebate of income-tax in case of certain individuals.

87A. 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.

Following proviso shall be inserted in section 87A by the Finance Act, 2023, w.e.f. 1-4-2024 :

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

(a) 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;

(b) 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. 

Now consider this Example-1 in which net taxable income is Rs. 6,90,000 and ultimate tax liability comes of Rs. 18,200

Particulars Example – 1
Pension / Salary before standard deduction 5,00,000
Short Term Capital Gain u/s. 111A  @15% 1,00,000
Long Term Capital Gain u/s. 112A  @10% 40,000
Long Term Capital Gain u/s. 112 @20% 1,00,000
Family Pension 0
Other Normal Rated Income 0
Actual Total Income 7,40,000
Less: Standard Deduction from Salary/Pension 50,000
Less: Standard Deduction from Family Pension 0
Net Taxable Income 6,90,000
Normal Rate Taxable Income            [A] 4,50,000
Special Rate Taxable Income (Before upto Rs. 1 Lakh deduction u/s. 112A)                [B] 2,40,000
Tax @ Normal Rate on [A] 7,500
Tax @ Special Rate @10% (After upto Rs. 1 Lakh deduction u/s. 112A) 0
Tax @ Special Rate @15% 15,000
Tax @ Special Rate @20% 20,000
Rebate u/s. 87A 25,000
Tax after Rebate 17,500
Cess @4% of “Tax After Rebate” 700
Net Tax (Effective Tax) 18,200

But if someone is having an income as per the following scenario in which only other source income of Rs. 11,000 is added, the ultimate tax liability comes down to the amount of Rs. 1,040 only. See the line to line comparison in the following table.

Particulars Example – 1 Example – 2
Pension / Salary before standard deduction 5,00,000 5,00,000
Short Term Capital Gain u/s. 111A  @15% 1,00,000 1,00,000
Long Term Capital Gain u/s. 112A  @10% 40,000 40,000
Long Term Capital Gain u/s. 112 @20% 1,00,000 1,00,000
Family Pension 0 0
Other Normal Rated Income 0 11,000
Actual Total Income 7,40,000 7,51,000
Less: Standard Deduction from Salary/Pension 50,000 50,000
Less: Standard Deduction from Family Pension 0 0
Net Taxable Income 6,90,000 7,01,000
Normal Rate Taxable Income            [A] 4,50,000 4,61,000
Special Rate Taxable Income (Before upto Rs. 1 Lakh deduction u/s. 112A)                [B] 2,40,000 2,40,000
Tax @ Normal Rate on [A] 7,500 8,050
Tax @ Special Rate @10% (After upto Rs. 1 Lakh deduction u/s. 112A) 0 0
Tax @ Special Rate @15% 15,000 15,000
Tax @ Special Rate @20% 20,000 20,000
Rebate u/s. 87A 25,000 42,050
Tax after Rebate 17,500 1,000
Cess @4% of “Tax After Rebate” 700 40
Net Tax (Effective Tax) 18200 1040

This awkward situation of “lower amount of tax with a higher amount of income” arises, because of the drafting mistake in newly inserted proviso (b) to section 87A of Income Tax Act, 1961.

In this situation, the tax evaders may show such an additional income voluntarily and can claim higher amount of rebate. This would result into (1) a loss to the government exchequer and (2) an Injustice with the honest tax payers.

So, government should amend the above referred proviso (b) in such a manner that the maximum rebate amount can not exceed Rs. 25,000 in any case.

****

CA Tejas Andharia | B.COM, F.C.A., D.I.S.A.(ICAI), D.I.R.M.(ICAI) | Bhavnagar, Gujarat

Author Bio

Qualification: CA in Practice
Company: T. K. ANDHARIA & CO.
Location: BHAVNAGAR, Gujarat, India
Member Since: 08 Apr 2018 | Total Posts: 50
He is Chartered Accountant by profession plus Song Writer, Composer, Piano player and Singer. One of his hobbies is to share technological knowledge . He was President of Bhavnagar C. A. Association for two consecutive terms. His Youtube Channel is "CA. Tejas Andharia" (more than 50,000 subscribers) View Full Profile

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One Comment

  1. PARTH DEVANG SHAH says:

    We need to check what calculation Department utility is making under such cases. Mist Probably dept will limit marginal relief upto 25k only.

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