How an additional income of Rs. 100 can save Tax of Rs. 79,920: A Case Study
For the financial year 2023-24, Basic Exemption Limit (BEL) is Rs. 2.50 Lakh if taxpayers opt for the Old Tax Regime (OTR) whereas it is Rs. 3 Lakh if taxpayers opt for the New Tax Regime (NTR). To offer the tax benefits to small taxpayers without enhancing the BEL, the concept of tax rebate under section 87A was introduced. However, lawmakers often commit mistakes in drafting the law which either results in unintended tax liability or confers unintended tax benefit. One such provision is section 87A in the Income Tax Act – 1961. Let’s explore its nuances.
Tax Rebate U/s 87A:
Up to financial year 2022-23, taxpayers earning up to Rs. 5 lakh were entitled to a tax rebate of Rs. 12,500 under section 87A. This rebate was the same whether taxpayers opted for the OTR or NTR. However, starting from the financial year 2023-24, the rebate limit has been increased to Rs. 25,000 for taxpayers choosing NTR. Here’s how the tax rebate under section 87A for the FY 2023-24:
a) For taxpayers opting for the OTR: Tax rebate shall be maximum of Rs. 12,500/- subject to the condition that the total income doesn’t exceed Rs. 5 Lakh.
b) For taxpayers opting for the NTR: Tax rebate shall be a maximum of Rs. 25,000/- subject to the condition that the total income doesn’t exceed Rs. 7 Lakh.
Though the law looks simple, it has few interesting nuances which are worth noting. Let us know about it:
1. Increase in income of Rs. 100/- may result in the additional tax liability of Rs. 12,500/- under Old Tax Regime:
For the person opting for old tax regime, the tax rebate of Rs. 12,500/- is available subject to the condition that the income doesn’t exceeds Rs. 5 Lakh. If the income exceeds Rs. 5 Lakh even by Rs. 100/-, no rebate of Rs. 12,500/- would be available to the taxpayers. In such a case, an additional income of even Rs. 100/- may result in additional tax liability of Rs. 12,500/- excluding cess @4%.
For example, if Mr. Smart has an income of Rs. 5 Lakh, he will be having zero tax liability. However, if he has an income of Rs. 5,00,100/-, his tax liability would be Rs. 12,520/-. Though the tax on Rs. 100/- is merely Rs. 20/-, the liability of Rs. 12,500/- is merely because of the fact that income is exceeding Rs. 5 Lakh.
2. Marginal Relief to the Taxpayers opting for NTR with income slightly above Rs. 7 Lakh:
a) Above anomaly of substantial increase in tax liability due to increase in small amount of income has been removed by Finance Act- 2023 by introducing the concept of marginal relief for NTR.
b) As a result of this, if the income of the person exceeds even marginally, say Rs. 100/-, the tax liability will not exceed the amount of income above Rs. 7 Lakh.
For example, Mr. Smart who is under the NTR has a regular income of Rs. 7,00,100/-. Though the income is exceeding Rs. 7 Lakh, the law now provides that the tax liability shall be restricted to Rs. 100/- only. One may note that the benefit of marginal relief is available only if the taxpayer is in NTR and not to those who are opting for the OTR.
In an attempt to remove this anomaly, the law makers have created a new one. Let me explain this with following case study:
| Particulars | Case-1 | Case-2 | Case-3 | Case-4 |
| Regular Income | 4,00,000 | 4,00,000 | 0 | 0 |
| LTCG on capital Assets other Shares [Taxable @ 20%] | 3,00,000 | 3,00,100 | 7,00,000 | 7,00,100 |
| Total Income | 7,00,000 | 7.00,100 | 7.00,000 | 7.00,100 |
| Tax on Regular Income | 5,000 | 5,000 | 0 | 0 |
| Tax on LTCG U/s 112 | 60,000 | 60,020 | 80,000 | 80,020 |
| Total Tax | 65,000 | 65,020 | 80,000 | 80,020 |
| Tax Rebate U/s 87A | 25,000 | 64,920 | 25,000 | 79,920 |
| Tax Payable (Excl. Cess) | 40,000 | 100 | 55,000 | 100 |
It may be noted that the tax slab and rate under the NTR are (a) No tax on income up to Rs. 3 Lakh (b) 5% tax on income in bracket of Rs. 3 to 6 Lakh (c) 10% for income bracket of Rs. 6 to 9 Lakh (d) 15% for Rs. 9 to 12 Lakh, (e) 20% for Rs. 12 to 15 Lakh (f) 30% on income above Rs. 15 Lakh. The LTCG on transfer of any assets other than Shares is taxable at a flat rate of 20% subject to the benefit of BEL if other normal income is less or nil. With this, one may note the following in above case studies:
a) Case – 1: Since the income is not exceeding Rs. 7 Lakh, the taxpayer shall be eligible for max tax rebate of Rs. 25,000/- U/s 87A.
b) Case – 2: Since the income is exceeding Rs. 7 Lakh marginally (i.e., the tax is much more than the income above Rs. 7 Lakh), the taxpayer shall be eligible for tax rebate of Rs. 64,920/- U/s 87A. The max ceiling of Rs. 25,000/- U/s 87A is applicable only if the income is not exceeding Rs. 7 Lakh. The ceiling of Rs. 25,000/- is not there once an income exceeds Rs. 7 Lakh.
c) Case – 3: Since the income is not exceeding Rs. 7 Lakh, the taxpayer shall be eligible for tax rebate of Rs. 25,000/- U/s 87A. LTCG @20% is on Rs. 7 Lakh less BEL of Rs. 3 Lakh.
d) Case – 4: Since the income is exceeding Rs. 7 Lakh only marginally (i.e., the tax is much more than the income above Rs. 7 Lakh), the taxpayer shall be eligible for tax rebate of Rs. 79,920/- U/s 87A.
Above are just a few hypothetical income figures to explain as to how additional income above Rs. 7 Lakh can result in additional tax benefits to the taxpayers.
Conclusion:
Section 87A is ill drafted from day one. To some extent, an attempt was made by the Finance Act – 2023 by introducing the concept of marginal tax relief. However, the lacuna in drafting & literal interpretation is going to cost the exchequer now. Law and Logic are often stranger but an attempt be made to harmonize both.
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
The Copy Of the Order as Under:
