The Finance Minister of India, Mrs Nirmala Sitharaman presented the budget 2023 and announced a very important change to be done in section 87A of the Income Tax Act, 1961. This further changed the calculation of income tax paid by the assesse. The change was drafted in the Finance Bill 2023 and enacted by the parliament which the Government of India further notified on March 31, 2023, and is in force from 1st April 2023. This article will deeply assess the changes made and their implications on the taxpayer.

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Section 87A of the Income Tax Act Before Amendment

Section 87A came into effect in the financial year 2013-2014 after being inserted by the Finance Act, 2013. It reads as follows:-

“An assessed, being an individual resident in India, whose total annual 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 annual 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.”

It means if a taxpayer's total annual income is five lakh rupees or less, he will receive a deduction. This deduction (discount on income tax to be paid) will be either equal to twelve thousand and five hundred rupees or equal to the amount of income tax applicable to be paid on the total annual income. For example, if your income is five lakh rupees and the applicable tax rate is five per cent then twenty-five thousand rupees tax is calculated on the total annual income, which is five lakh rupees. Now as per the provision of this section, you will get a deduction of either twelve thousand and five hundred rupees or the tax (which we just calculated twenty-five thousand rupees), whichever is less; means twelve hundred and five hundred rupees.

Section 87A of the Income Tax Act After Amendment

Now that section 87A is amended by the Finance Act 2023, some alterations have been made to the section and the deduction to be received now will be calculated differently. Two provisos are added in section 87A of the Income Tax - one for those whose income is seven lakh rupees or less and one for those whose income is more than seven lakh rupees. The new calculations shall be made as follows:-

If the total annual income of the taxpayer is seven lakh rupees or less and the calculated tax on his total annual income is equal to or less than twenty-five thousand rupees then he doesn't need to pay any income tax for that financial year but if the calculated tax is more than twenty-five thousand rupees then he will get a deduction of twenty-five thousand rupees only.

The above-explained rule is given in the first proviso. If the total annual income of the assessee is more than seven lakh rupees then also second proviso of section 87A of the Income Tax Act is applicable but it gets a little more complicated hence is explained further below.

Applicability

The Finance Act, 2023 was notified by the central government on 31st March and it is enforced from 1st April 2023. It means all the tax calculations for the assessment year 2024-2025 will be done based on these new rules. Specifically, section 87A will be applicable to those people whose total annual income for the financial year 2023-2024 is approximately seven lakh rupees or less. He also must be an individual resident of India.

Comparison with Old 87A Provisions

As we discussed above provisions on both old and new versions are not very different in terms of the people they are applicable to. Those who were getting benefits under section 87A of the income tax act will keep taking benefits and more people will receive this benefit as the threshold of the total annual income is increased from five lakh rupees to seven lakh rupees. Although the old existing words are not changed but new provisos are added to section 87A.

An interesting change is that in the older version, only the people having a total annual income equal to or less than the prescribed threshold were getting the benefits but in the new version some people whose total annual income is more than the prescribed threshold will also be getting limited benefits. This will be very clear with the examples shared below.

Rebate Provisions

When government pays back or wants to refund an amount back to the taxpayer because of the reason that he paid too much tax with respect to his income, it is called a ‘Rebate’. Provisions regarding rebates were added to the Income Tax Act, 1961 by the Finance Act, 2013 through the addition of a new section 87A. At that time maximum rebate amount was two thousand rupees. It was amended later in 2016 to a rebate amount of five thousand rupees then in 2017 it was set to two thousand and five hundred rupees which got changed in 2019 with the highest amount so far, twelve thousand and five hundred rupees. Now with the Finance Act 2023, it is yet again changed and doubled to twenty-five thousand rupees.

Keeping the current provisions in mind it can be concluded that if the assessee has a total annual income that is covered with the income threshold of section 87A of the Income Tax Act, 1961 and his calculated taxes are not exceeding the amount of rebate i.e. twenty-five thousand rupees then he does not have to pay any income tax for that financial year.

How to Calculate Rebate Amount?

To find out whether you are eligible to get a rebate or not and if yes then how much, you need to have some data beforehand. You must know your annual income (it is called gross total income), deductions other than the rebate (it includes all other deductions prescribed in Chapter VI A of the Income Tax Act, 1961), and applicable tax rate. Now you can calculate your total annual income which is different from your gross total annual income and can be calculated with the following formula:-

Total Annual Income = Gross Total Annual Income - Deductions Claimed (Except Chapter VIII)

This total annual income is your taxable income on which the tax is levied as per the applicable tax rate. The Tax can be calculated with the following formula:-

Calculated Tax = (Total Annual Income x Applicable Tax Rate)/100

Now you have two amounts, one is your total annual income and the other is the calculated tax on that income. You can now find out how much rebate you can get as per section 87A of the Income Tax Act, 1961. Examples are given below for reference.

Examples

Two provisoes are added to section 87A. Condition 1 and Condition 2 explain the applicability of the first proviso while Condition 3 and Condition 4 explain the applicability of the second proviso.

If the total annual income of the taxpayer is less than or equal to seven lakh rupees then go through the following examples to see how many deductions will be given to such people:-

Condition 1

For example, if the taxpayer’s total annual income is seven lakh rupees and the tax rate is five per cent then his calculated income tax is thirty-five thousand rupees which is more than the maximum rebate amount (twenty-five thousand rupees) which means he has to pay only ten thousand rupees.

Total Annual Income = Rs. 7,00,000

Calculated Tax = Rs. 35,000

Maximum Rebate = Rs. 25,000

Deduction = Rs. 25,000

(Because the maximum rebate amount is less than the calculated tax)

Tax Payable = 35,000 - 25,000 = Rs. 10,000

Condition 2

For example, if the taxpayer’s total annual income is four lakh rupees and the tax rate is five per cent then his calculated income tax is twenty thousand rupees which is less than the maximum rebate amount (twenty-five thousand rupees) which means he does not have to pay any income tax for that financial year.

Total Annual Income = Rs. 4.00,000

Calculated Tax = Rs. 20,000

Maximum Rebate = Rs. 25,000

Deduction = Rs. 20,000

(Because the calculated tax is less than the maximum rebate amount.)

Tax Payable = 20,000 - 20,000 = Rs. 0

If the total annual income of the taxpayer is more than seven lakh rupees then go through the following example to see how many deductions will be given to such people:-

Condition 3

For example, if the taxpayer’s total annual income is seven lakh and ten thousand rupees and the tax rate is five per cent then his calculated income tax is thirty-five thousand and five hundred rupees which is more than his excessive income (ten thousand rupees) which means he has to pay only ten thousand rupees.

Total Annual Income = Rs. 7,10,000

Calculated Tax = Rs. 35,500

Excessive Income = 7,10,000 - 7,00,000 = Rs. 10,000

Deduction = 35,500 - 10,000 = Rs. 25,500

(Because the calculated tax is more than the excessive income.)

Tax Payable = 35,500 - 25,500 = Rs. 10,000

Condition 4

For example, if the taxpayer’s total annual income is seven lakh and fifty thousand rupees and the tax rate is five per cent then his calculated tax is thirty-seven thousand and five hundred rupees which is less than his excessive income (fifty Thousand rupees) which means he will get no deduction and has to pay full thirty-seven thousand and five hundred rupees as income tax.

Total Annual Income = Rs. 7,50,000

Calculated Tax = Rs. 37,500

Excessive Income = 7,50,000 - 7,00,000 = Rs. 50, 000

Deduction = Rs. 0

(Because the excessive income is more than the calculated tax.)

Tax Payable = 37,500 - 0 = Rs. 37,500

To make it even more clear a table is given below to understand how the tax liability changes with respect to the total annual income of the assessee based on the latest provisions of section 87A of the Income Tax Act 1961.

Note: Tax is calculated at the rate of 5 per cent and the amount is written in Rupees.

Final Words

It can now be concluded that if the assessee is an individual and resident of India then he can claim a rebate in his income tax under section 87A of the Income Tax Act, 1961. His taxable salary after deductions under Chapter VI A shall be within the prescribed limit. All technicalities are explained above with the help of tables and charts. If the eligible rebate is more than the applicable tax then the assessee need not to pay any and if the applicable tax is more than the eligible rebate then the assessee has to pay the difference as income tax. Hope this article helped you to understand everything about the latest developments in the rebate provisions.