Error in drafting Section 87A of Income Tax Act, 1961

CA Tejas Andharia | Last updated: 06 February 2024

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The article discusses a potential drafting error in the new proviso (b) to Section 87A of the Income Tax Act, 1961, effective from Assessment Year 2024-25. This error could lead to a situation where individuals with higher incomes end up paying less tax due to an increased rebate. The author highlights this as an injustice to honest taxpayers and a potential loss to the government, suggesting an amendment to cap the maximum rebate at Rs. 25,000.

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 :

Section 87A Income Tax Act: New Proviso Explained

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 andthe 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 tothe 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 taxpayers.

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.

FAQ :

Section 87A provides a rebate on income tax for resident individuals in India whose total income does not exceed Rs. 5,00,000. The rebate is 100% of the income tax or Rs. 12,500, whichever is less.

A new proviso has been inserted into Section 87A by the Finance Act, 2023, effective from 1st April 2024. This proviso introduces different rebate calculations for individuals whose total income is chargeable under section 115BAC.

The new proviso, specifically part (b), may contain a drafting error. This error could result in individuals with incomes exceeding Rs. 7,00,000 paying less tax than those with slightly lower incomes, due to an unexpectedly high rebate calculation.

The article provides an example where an individual with a net taxable income of Rs. 6,90,000 has a tax liability of Rs. 18,200. However, by adding a small amount of other source income to reach Rs. 7,01,000, the tax liability drops significantly to Rs. 1,040 due to the calculation under the new proviso.

The author suggests that the government should amend the proviso (b) to Section 87A to ensure that the maximum rebate amount does not exceed Rs. 25,000 in any case, thereby preventing this unintended consequence.