Rebate u/s 87A: Does It Cover Special Rate Incomes? – Old vs New Tax Regimes Explained

-

Back with another deep dive—this time into a deceptively simple tax rebate that’s anything but straightforward. Section 87A may look like a quick win, but when special rate incomes enter the picture, things get interesting.

Tax rebate under Section 87A has been a key relief for resident individuals with lower income. However, its interaction with special rate incomes such as short-term capital gains (STCG) and long-term capital gains (LTCG) has caused significant confusion.

Let’s break it down by regime.


1. What is Rebate u/s 87A?

  • Available only to resident individuals.
  • Under the old tax regime: Applicable if total income ≤ ₹5,00,000. Maximum rebate: ₹12,500.
  • Under the new tax regime (Sec. 115BAC(1A)): Applicable if total income ≤ ₹7,00,000. Maximum rebate: ₹25,000 (with marginal relief for slightly higher income).

The rebate reduces tax liability, not income.


2. New Tax Regime – Special Rate Incomes Are Excluded

The Finance Act, 2023 inserted a proviso under Section 87A (effective from AY 2024–25), clearly stating that:

Tax on incomes chargeable at special rates (e.g., capital gains under Sections 111A, 112, 112A, etc.) shall not be included when determining the rebate under Section 87A.

This means, under the new regime:

  • STCG, LTCG, and other special rate incomes are kept out while computing rebate eligibility.
  • Only slab-based income qualifies for rebate adjustment.

Illustration – New Regime

  • Normal income: ₹6,80,000
  • LTCG u/s 112A: ₹1,50,000

Tax on ₹6,80,000 (after rebate) = Nil (since under ₹7 lakh)
Tax on LTCG (10% over ₹1 lakh) = ₹5,000 (rebate not applicable here)


3. Old Tax Regime – The Grey Area

Under the old regime, Section 87A reads:

“An assessee, being an individual resident in India, whose total income does not exceed five lakh rupees, shall be entitled to a deduction, from the income-tax on the total income … of an amount equal to the amount of income-tax or twelve thousand five hundred rupees, whichever is less.”

Here’s the key:

  • The law does not explicitly exclude special rate incomes (like STCG u/s 111A).
  • However, LTCG u/s 112A is specifically denied rebate through its own section wording.

Thus, the general interpretation is:

  • Rebate can be claimed even if STCG u/s 111A is present, provided total income ≤ ₹5,00,000.
  • Rebate cannot be claimed against LTCG u/s 112A tax.


4. Why the Confusion?

  • Recent ITR utilities automatically disallowed rebate on special rate incomes under the old regime too, despite no explicit statutory change.
  • Experts and bodies like BCAS (Bombay Chartered Accountants' Society) pointed out that this system logic was inconsistent with law and requested correction.


5. Key Takeaways

  • New Regime (Post Finance Act 2023): Explicit exclusion of special rate incomes for rebate computation.
  • Old Regime: No explicit exclusion except for LTCG u/s 112A; STCG u/s 111A may still qualify.
  • Always segregate normal slab income from special rate income when computing tax.


6. Final Words

Section 87A remains a taxpayer-friendly provision, but with the evolution of tax regimes, its scope has shifted.

  • Under new regime, special incomes are out of scope by law.
  • Under old regime, interpretation favors inclusion except where law specifically denies (LTCG u/s 112A).

Proper tax planning and correct ITR filing ensure you benefit from available rebates without facing later adjustments or notices.


Until next time, keep learning, keep questioning.

— Your CA in the Making:).....

Comments

Post a Comment

Popular posts from this blog

When Airlines and Tax Laws Collide: A Case Study on Lufthansa German Airlines v. Department of Income Tax

-
Welcome back, after a short break, I’m back with a full-fledged blog—this time diving deep into a real-world international tax scenario that perfectly blends law, finance, and strategic thinking Lufthansa German Airlines v. Department of Income Tax Delhi High Court Judgment | 7th October 2002 This landmark judgment by the Delhi High Court is a powerful example of how international taxation principles operate under a Double Taxation Avoidance Agreement (DTAA). It covers critical concepts such as  profit attribution ,  pool arrangements ,  Permanent Establishment , and  treaty interpretation . Case Background Lufthansa German Airlines, a German-based international airline operating flights to and from India, was assessed by the Indian Income Tax Department on certain profits earned through rendering technical and ground handling services under the International Airlines Technical Pool (IATP) arrangement. The dispute centered on whether these profits quali...
Read more

Filing My First ITR-U: A Quick Lesson

-
After my CA exams were over, I had a small list of topics I wanted to explore—and ITR-U (Updated Return) was one of them. I had never filed it before and planned to understand it properly once I got some free time. Little did I know, the opportunity to learn it would come sooner than expected—and not through books, but through real work. Once I resumed work post-exams, my principal asked me to file a return for a client. At first, I didn’t realize it was an updated return . It was only when I started going through the client’s files that I noticed the previous year’s return hadn’t been filed at all. That’s when it clicked—this wasn’t a regular return. It had to be filed under ITR-U. Like I always do when I come across something new, I turned to ChatGPT for some guidance. It gave me all the necessary information: the process, applicable sections, and steps involved. With that support, I filed my first ITR-U . Here’s What I Learned: Select the Correct Section You need to select ...
Read more

Closing an LLP — My First Experience & Key Pointers ✨

-
Hi everyone! I know it’s been a while since my last blog post (life got a little busy!) — but here I am, finally back to share something that I recently tried for the first time — closing an LLP . Since this was my first attempt at handling the closure process, I thought it would be useful to jot down my experience and key learnings in case any of you are planning to go through the same process. So here’s a simple, pointer-wise breakdown of the process and my takeaways:  1️⃣ Understanding the Basics • The LLP (Limited Liability Partnership) I worked on had been inactive for a while, and the partners wanted to close it formally. • Strike off application is the most common route if the LLP is inactive and there are no pending liabilities. • Relevant section: Rule 37 of LLP Rules, 2009 . • The simplified process for striking off an LLP is prescribed under Form 24 . (You can refer to the MCA portal for latest filing guidelines and circulars.) 2️⃣ Pre-requisites — What You Need Before S...
Read more