[Opinion] Controversial Issue Regarding Rebate u/s 87A in Respect of Incomes Eligible for Special Rate of Tax

V K Subramani – [2024] 164 taxmann.com 371 (Article)

Taxation of income on the basis of presumptive provisions has come to stay. What was started in a small measure applicable for retail traders by inserting section 44AF about 25 years ago has gained acceptance and prominence over the years. Insertion of many more presumptive provisions in the statute book is a testimony of the success of such provisions. Presently, presumptive provisions have expanded scope and coverage and in the case of personal taxpayers’ sections 44AD and 44ADA which are meant for persons carrying on business and notified profession respectively are being used effectively and efficiently to benefit all the stakeholders.

Just like deeming provisions meant for facilitating an item of receipt as income or some outlay as expenditure, now even computation of income under the head ‘Profits and gains of business or profession’ is possible presumptively by optional deeming provisions which are contained in the Income-tax Act,1961.

Scope of sections 87A and 115BAC

Section 87A was originally inserted by Finance Act, 2013 w.e.f. assessment year 2014-15, which gave the rebate of tax to personal taxpayers. Gradually, the rebate was enhanced and for the assessment year 2023-24 it was Rs.12,500 or the amount of income tax whichever is less, where the total income did not exceed Rs.5 lakhs. This provision was intended to encourage spending by the taxpayers without resorting to savings and other exemptions for the purpose of minimization of income tax liability. There was no provision for marginal relief.

Section 115BAC was inserted by the Finance Act, 2020 applicable from assessment year 2021-22. It moderated the rates of income-tax when opted by the taxpayers. Again, the Finance Act, 2023 inserted sub-section (1A) to section 115BAC which prescribed the rates of income tax with different income slab limits for applying these prescribed differential tax rates.

Some of the other significant benefits bestowed by the Finance Act, 2023 are

1. there is marginal relief for income exceeding Rs.7,00,000 under proviso to section 87A when the taxpayer opts for section 115BAC(1A);
2. increase in quantum of tax rebate to Rs.25,000 when opted for section 115BAC(1A); and
3. allowance of standard deduction for salary earners (which was denied earlier) when the income is computed income under section 115BAC.

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