Rebate u/s 87A not allowed in new tax regime against special rate income | Right or wrong?

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Recently, we have seen an update in the Income tax return Utility announced by CBDT on 05.07.2024, after which people are facing an issue wherein, they were not allowed rebate u/s 87A of the Act against special rate income.

Let’s first discuss what is the rebate:

Section 87A of the Income tax act deals with the rebate under Income tax act wherein if the total income of a resident individual does not exceed a threshold they would be entitled to a rebate of a certain tax amount, rebate can be understood as a reduction from the total tax amount.

Relevant extract of Section 87A is as under:

“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.”

The issue has been arisen because of the proviso added by Finance Act, 2023 which states that wherein total income of assessee is chargeable to tax under section 115BAC (1A) and the total income does not exceed Rs.7lakh then assessee shall be allowed a rebate of 100% tax or Rs.25000 whichever is less.

The above proviso talks about total income and does not exclude special rate income from the application of rebate and further if we read the memorandum to Finance Bill, 2023 there also there was no mention of only including normal rate income. Even in the earlier provision the special rate income was eligible to rebate.

Now, since there are two tax rates or two tax regimes to tax normal rate income hence if a person opts for taxing it’s normal rate income under the new tax regime of 115BAC(1A), his total income including the special rate income would fall eligible for tax rebate unless specifically excluded from such benefit.

Section 112A of the Income Tax Act which specifically excludes itself from the benefit of rebate u/s 87A of the Act, however no such exclusion is mentioned in section 111A of the Act or in any other special rate provision. Further, it is a proviso to the main provision and where the main provision does not exclude such special rate income from the benefit of rebate, excluding section 111A from the benefit of rebate would be an incorrect interpretation of law in our humble opinion as that was never the intention of law.

Further, such change was only introduced vide the update in utility on 5th July whereas such amendment was done by Finance Act, 2023 and if such was the intention of CBDT then they would have implemented it in the initial release of utility and now those who have filed return under new regime before 5th July and taken benefit of rebate what would happen to their return of income.

Thus, an assessee who is opting for the new regime is not being allowed any rebate under the new regime if he has STCG u/s 111A of the Act whereas under the old regime he is being allowed the exemption.

For Eg:

A person who is earning other sources income of Rs.250000 from interest, dividend and also having income from STCG of Rs.1 lakh u/s 111A. Now his total income is Rs.350000.

Accordingly, under the old regime he is eligible for rebate u/s 87A of the Act and accordingly his total tax payable is Rs.15600 and he will be eligible for a deduction of Rs.12500 from total tax and accordingly he will be liable to pay tax of Rs.3100.

Now, in the new regime if the person is having same income and eligible for rebate u/s 87A of the Act, however, he will be liable to pay tax of Rs.15600 whereas a rebate of Rs.25000 is available with him which in our humble understanding is not the intention of law.

If we consider the interpretation of Income tax department that total income shall not include special rate income then in a case where assessee has a normal rate income of Rs. 650000 and special rate income of Rs.100000 then assessee should be still allowed rebate u/s 87A of the act under new tax regime of section 115BAC.

Thus, we hope that the CBDT realizes this and either issue a clarification or an update in the utility to allow the benefit of rebate u/s 87A for the new tax regime.

Guidance on above article on Income Tax by:

Naman Maloo (C.A., B.Com)
He is currently working as Partner – Direct Tax with a renowned firm in Jaipur having experience in dealing Assessments before Income Tax authority, Tax Audit, International Taxation, Tax planning for NRI, Business planning and consultation.
E-mail: naman.maloo@jainshrimal.in | LinkedIn: Naman Maloo

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