Vide Finance Bill, 2019, an amendment has been made in section 87A of the Income-tax Act to increase the amount of rebate of Income-tax allowable in the case of individual assessees. Before discussing the amendment made in quantum of tax rebate it may be stated that under the Income-tax Act, there are three ways of granting tax relief to an assessee; i.e.
– Exemption in respect of income
– Deduction allowable
– Income-tax rebate allowable.
In regard to certain income, exemption has been provided under the Income-tax Act such as exemptions u/ss. 10 to 13 of the Act in respect of various items of income. Income which has been exempted does not form part of computation of taxable income. Accordingly, same are outside the scope of tax computation. Secondly, various provisions of Income-tax Act provide for allowability of deductions in computation of taxable income. Deductions have either been provided in computation of income under respective heads such as salary, income from house property, business income, capital gain and income from other sources or under Chapter VI-A of Income-tax Act, sections 80A to 80U. Such deductions are allowable in respect of income earned or expenses incurred in determination of taxable income. In other words, income is taken at a gross basis and thereafter deductions provided in respective sections are allowed. The third manner of providing relief to an assessee is by way of income-tax rebate or relief provided in sections 87A, 89, 90 and 91 of the Act.
Reason for providing tax relief in different manner
As stated hereinabove, tax relief can be allowed in respect of an income or expenditure in a different manner either as exemption or deduction or by way of allowing tax rebate or relief. The question arises that why there are three separate ways of granting tax relief. It is stated in this regard that when a particular income is considered to be of nature which the legislature does not intend to tax for various reasons, may be political or economic, it is provided that such income will not be covered under the scope of taxable income under the Income-tax Act. Agriculture income is a leading example, which is not being taxed for political reason. Similarly, many items of income which either have already been taxed, such as, share of partnership firm or which have been exempted, such as, income of charitable institutions, political parties and of undertakings set up in free trade zone, economic zone or export zone etc. The primary reason for keeping such items of income out of scope of taxability under the Income-tax Act appears to be that the legislature does not want to include such income under the provisions of Income-tax Act at all.
In regard to deductions allowed by the legislature, there are items of expenditure for which deductions have been provided in computation of taxable income under the respective heads of income. As per the principle, deduction is allowed for all the expenses which have been incurred for earning the income chargeable under the respective heads. Apart from above, sections 80A to 80U of the Act provide for deductions which are available against the gross total income in respect of certain items of income which are included and forming part of gross total income. These deductions are by way of incentives for economic and social reasons.
Income tax rebates have been provided in the Income-tax Act with a view to allow a rebate or relief from the income tax payable, which is determined with reference to total income calculated as per provisions of Income-tax Act. Income tax reliefs are provided to grant relief in specific cases and not as a general relief to all the assessees.
Deductions vis-à-vis Income-tax rebate
It is observed from the history that legislature has in the past shifted the manner of granting relief for same item, such as investment in saving schemes, some time as deduction some time as income-tax rebate. in respect of those items. Up to A.Y. 1967-68 income-tax rebate was allowed on investments in saving schemes. In A.Ys 1968-69 to 1990-91 deduction was allowed for the same under section 80C of the Income-tax Act. Again during the A.Y. 1991-92 to A.Y. 2005-06 income-tax rebate was allowed and again from A.Y. 2006-07 deduction has been allowed and still deduction is being allowed u/s. 80C of the Income-tax Act. The issue is why the manner of allowing tax advantage was shifted from deduction to income-tax rebate and again from income-tax rebate to deduction and so on. It may be stated in this regard that when deduction is allowed in respect of certain items, say, investments in saving schemes tax advantage of such deduction will be available to all the assessees irrespective the tax slab in which a particular assessee falls. As a result, a person liable to pay tax at higher rate gets more tax advantage as compared to an assessee who is in the lower slab rate for payment of income-tax. In case any tax rebate is allowed at a percentage with reference to amount of investment, amount of tax rebate will remain the same for all the assessees. In fact, this was the reason given in the Finance Bill, 1990. In the Memorandum explaining provisions in the Finance Bill, when provisions of section 80C were omitted and section 88 was reinserted for allowing income-tax relief. Extracts from the Memorandum read as under:-
“Under the existing scheme of section 80C, a person gets tax relief at the highest marginal rate of tax applicable to him. Accordingly, it confers higher amount of tax incentive to a person with a higher income vis-à-vis a person with a lower income. The scheme is, therefore, regressive and iniquitous.”
Therefore, it can be stated that when deduction is allowed in respect of a particular item of income, it is allowable to all the assessees and benefit of same will be available at the rate of tax applicable to particular assessee. System of allowing deduction, in fact, is simpler one and is more logical and is directly related to particular nature of income. Therefore, it is appropriate to allow deduction when the intention of the legislature is to exempt the same or allow an incentive with reference to such income or investment. The manner of providing income-tax rebate is not equitable to all the assessees. Irrespective of the nature of income or the amount of investment, income rebate is allowable at particular percentage to all the assessees and, therefore, though it provides tax advantage to all the assessees but, relatively assessees in lower tax slab, either get full tax waiver or higher tax waiver in relation to their tax liability. Assesses in higher slab rate either get no advantage or lesser tax advantage. The system of providing income-tax rebate, however, has been adopted from time-to-time by the legislature when it is intended to give more relief to assessees in the lower tax slab.
Further, in the case of allowing deduction, quantum of taxable income stands reduced whereas in a case where income-tax rebate is allowed, amount of taxable income continues to be same, though the assessees may not be liable to pay any tax after availing income-tax rebate. For the above reason, the assessees who are not liable to pay income-tax also continue to be assessees under the Income-tax Act and they are liable to file return of income. Accordingly, it places avoidable burden on the assessees of filing returns of income. Similarly, it also burdens the administrative machinery of the Government to process such income-tax returns and make the assessments. Therefore, allowing deductions is a better proposition than the manner of allowing income-tax rebate.
Present provisions and amendment in allowability of income tax rebate
Provisions of section 87A of the Income-tax Act which was earlier omitted w.e.f. 1-4-1968 (A.Y. 1968-69) were re-inserted vide Finance Act, 2013, w.e.f. A.Y. 2014-15 providing for income-tax rebate and thereafter same have been amended from time-to-time and have also been amended vide Finance Bill, 2019 w.e.f. Assessment Year 2020-21. The year-wise position of income tax rebate allowable is as shown in the following table:
| Assessment Year |
Basic exemption limit (₹ ) |
Qualifying amount of income for tax rebate up to (₹ ) |
Amount of tax rebate available up to (₹ ) |
| 2014-15 | 2,00,000 | 5,00,000 | 2,000 |
| 2015-16 | 2,50,000 | 5,00,000 | 2,000 |
| 2016-17 | 2,50,000 | 5,00,000 | 2,000 |
| 2017-18 | 2,50,000 | 5,00,000 | 5,000 |
| 2018-19 | 2,50,000 | 3,50,000 | 2,500 |
| 2019-20 | 2,50,000 | 3,50,000 | 2,500 |
| 2020-21 | 2,50,000 | 5,00,000 | 12,500 |
Analysis of amended provision of income tax rebate
The amendment provides for allowability of income-tax rebate up to ₹ 12,500 against tax payable by an individual assessee having taxable income up to ₹ 5,00,000. At present basic exemption is ₹ 2,50,000 and on the income above ₹ 2,50,000 up to ₹ 5,00,000 tax is payable @ 5%. Accordingly, amount of tax payable on the income of ₹ 5,00,000 is ₹ 12,500. Hence, no tax will be payable by an individual assessee whose taxable income is up to ₹ 5,00,000. As a result of aforesaid increase in the income tax rebate an assessee having salary income up to ₹ 7,50,000 will not be liable to pay any tax after considering standard deduction of ₹ 50,000, investment in saving schemes u/s. 80C of ₹ 1,50,000 and deduction u/s. 80D for medical insurance and expenses of ₹ 50,000. Large number of employees as well as other assessees having taxable income of ₹ 5,00,000 will not be liable to pay any tax now.
There are, however, two major problems in regard to provision of income-tax rebate as has been amended, which are as under:
1. Marginal relief has not been provided in respect of assesses whose income just exceeds the limit of ₹ 5,00,000. For example, in case an assessee has taxable income of ₹ 5,10,000, in his case, the tax payable at the existing slab rates will work out to ₹ 14,500, apart from cess. He, however, will not be entitled to any income-tax rebate since his income is more than ₹ 5,00,000 and, therefore, will be liable to pay income tax of ₹ 14,500 even though his income exceeds the limit of ₹ 5,00,000 by ₹ 10,000/- only. There may be even such cases where income exceeds only by few hundred rupees or, say, ₹ 1,000. In such cases, the provision should have been made for marginal relief. It has always been the practice in the past to provide marginal relief in such cases. Accordingly, it should have been provided that Income-tax payable in such cases will not exceed the amount of total income exceeding ₹ 5,00,000. It appears that this is through an oversight and, therefore, necessary corrective measures should be taken by the Government.
2. In case of assessees having long term capital gain which is chargeable u/s. 112A of Income-tax Act, sub-section (6) of section 112A provides that tax rebate allowable u/s. 87A is not to be allowed with reference to amount of long term capital gain. In other words, the amount of rebate allowable u/s. 87A will be restricted with reference to the income other than the long term capital gain. As per provisions of section 112A of the Act long term capital gain is exempt up to ₹ 1,00,000 and on long term capital gain in excess of ₹ 1,00,000 tax is payable @ 10%. The amount of long term capital gain, including amount of ₹ 1,00,000 on which no tax is payable u/s. 112A will form part of total income of the assessees and, therefore, limit provided of ₹ 5,00,000 in section 87A will be applicable in such cases also notwithstanding that amount of long term capital gain may be exempt or may be taxable @ 10%. In earlier provisions the amount of tax rebate available u/s. 87A was only of ₹ 5,000 which was equivalent to amount of tax payable @ 5% on ₹ 1,00,000, which was the exempted amount of long-term capital gain. Accordingly, there was no loss to assessees having long term capital gain even if the income-tax rebate was not allowable to them. Now as per amended provision, the assesses who is having, say, total income on account of long term capital gain of ₹ 5,00,000, will have to pay income tax of ₹ 15,000/- after considering basic exemption limit of ₹ 2,50,000 and exempted amount of long term capital gains of ₹ 1,00,000. Therefore, it is unreasonable and illogical that an assessees having income from any other source up to ₹ 5,00,000 will not be liable to pay any tax whereas an assessee who is having only income from long term capital gain will be liable to pay more tax. Further, as per the provisions of sub-section (5) of section 112A even deduction available under Chapter VI-A of the Income-tax Act are not available with reference to long term capital gains. If we compare position of two assessees, namely, an employee who is earning salary income of ₹ 7,50,000 and of an assessee earning same amount of income from long term capital gains, the position of tax liability would be as under:
| Particulars | Income from salary (₹ ) |
Income from long term capital gains (₹ ) |
| Income | 7,50,000 | 7,50,000 |
| Less: Standard Deduction | 50,000 | – |
| Gross Total Income | 7,00,000 | 7,50,000 |
| Less: Deduction u/s. 80C | 1,50,000 | – |
| Less: Deduction u/s. 80D | 50,000 | – |
| Total Income | 5,00,000 | 7,50,000 |
| Basic Exemption Limit | 2,50,000 | 2,50,000 |
| Long term capital gain exempt u/s. 112A | – | 1,00,000 |
| Income-tax payable | 12,500 | 40,000 |
| Less: Rebate u/s. 87A | 12,500 | – |
| Net Tax Payable | Nil | 40,000 |
| Education Cess @ 4% | Nil | 1,600 |
| Tax Payable | Nil | 41,600 |
Suggestions
It is suggested that necessary amendments should be made in provisions of section 87A of the Act. Preferably the qualifying limit should be increased from ₹ 5,00,000 to ₹ 10,00,000 so that abovementioned anomalies on account of marginal relief as well as in case of assessees having long term capital gains can be resolved.