87A Rebate: A Loophole or a Logic-defying Legislation?
The Indian tax system never ceases to surprise. Just when you think it’s getting simpler, a new twist comes along, leaving taxpayers scratching their heads. One such quirk comes from the Finance Bill 2025’s amendment to Section 87A – the provision that allows small taxpayers to reduce their tax burden. In its latest form, it seems to benefit some high-income earners while leaving those with lower incomes struggling to pay up.
A Quick Recap: What’s changing?
The 2023 Finance Act had already increased the income limit for the Section 87A rebate from Rs.5 lakh to Rs.7 lakh under the New Tax Regime (NTR) along with a higher rebate cap of Rs.25,000. It also introduced marginal relief provision to prevent excessive tax burdens on those slightly exceeding the rebate limit.
Now, the Finance Bill 2025 proposes the following in section 87A for individual resident taxpayers opting for the New Tax Regime (NTR):
1. Raising the income limit from ₹7 lakh to ₹12 lakh.
2. Increasing the tax rebate cap from ₹25,000 to Rs.60,000/-.
3. Specifically restricting the rebate only to normal income & notagainst income taxable at a special rate like long-term capital gains (LTCG) or short-term gains (STCG) on shares taxable u/s 111A.
4. Increase in the Basic Exemption limit (BEL) from Rs.3 Lakh to Rs.4 Lakh. [There is no change in the BEL under the Old Tax Regime (OTR) which is at Rs.2.50 Lakh].
Special Rate Income & Rebate U/s 87A till FY 2023-24:
Until FY 2023-24, Section 87A did not explicitly exclude special rate income from rebate eligibility, yet CPC disallowed it by misinterpreting the provision. The Bombay High Court has left this issue for appellate authorities to decide. With the new amendment, this debate is over – no rebate for special rate income from FY 2024-25 onwards. Rebate u/s 87A against special rate income for FY 2023-24 would be a matter of litigation before appellate authorities.
The 87A Paradox: A Case of Bizarre Taxation:
For the FY 2024-25, tax rebate would not be at all available against special rate income. With this amendment proposed in the Finance Bill – 2025, a few interesting scenarios would emerge. Let’s understand the impact of this amendment with a few real – life like examples:
1. Mr. Ram has earned an interest income of Rs.12 Lakh for the FY 2025-26. Since his income is not exceeding Rs.12 Lakh, entire tax on income of Rs.12 Lakh i.e., Rs.60,000/- would be admissible as rebate U/s 87A and his final tax liability would be Nil. Lucky man!
2. Mr. Shyam has earned a LTCG of Rs.6 Lakh for the FY 2025-26 on sale of Shares. As we all know, LTCG is income taxable at a special rate of taxation of 12.50% and so no rebate u/s 87A would be admissible against it. However, he would be eligible for the benefit of Basic Exemption Limit (BEL) ofRs.4 Lakh against LTCG. As a result, his taxable LTCG is Rs.2 Lakh & the resultant basic tax liability would now be Rs.25,000/-. Since it is a special rate income, no rebate u/s 87A would be admissible despite the fact that his income is less thanRs.12 Lakh and the tax rebate amount may not be exceeding Rs.60,000/-.
Wait…what just happened? Mr. Shyam’s income is half of Mr. Ram’s, yet he pays tax while Mr. Ram pays nothing? If that sounds unfair, hold on – because things get even stranger!
3. Let us consider another case of Mr. Ganesh. His total income during FY 2025-26 is Rs.1.12 Cr consisting of interest income is Rs.12 Lakh and has a LTCG of Rs.1 Cr. In his case, his basic tax liability would beRs.13.10 Lakh (Rs. 12.50 Lakh on LTCG & Rs.60,000/- on Interest income).
But here’s the kicker: Since his regular income (interest) is within ₹12 lakh, he qualifies for the full ₹60,000 rebate! One may note that the special rate income is not at all required to be considered while calculating the threshold limit of Rs.12 Lakh u/s 87A.
Result? A millionaire gets a tax break, while a small investor like Mr. Shyam pays tax on his ₹6 lakh LTCG.
When Tax Policy Fails the Logic Test
The idea behind Section 87A was to help small taxpayers reduce their tax burden. Instead, the new amendment unintentionally favours high-income individuals with a mix of special and regular income while penalizing those who primarily earn through investments.
Here’s the problem:
– A taxpayer with ₹1.12 crore in total income can claim the rebate, but a small investor with Rs.7 lakh LTCG cannot.
– An individual earning ₹12 lakh in regular income pays zero tax, while another with ₹6 lakh LTCG has to pay Rs.25,000.
– By excluding special rate income, the amendment undermines the very purpose of the rebate.
A Smarter Fix: The ₹60,000 Blanket Rebate
What could have been done instead? A more rational approach would have been by offering a flat ₹60,000 rebate to all taxpayers whose total income is ₹12 lakh or less – regardless of the income type (normal or special rate).
This would have ensured that:
Lower-income taxpayers actually benefit from the rebate.
High-net-worth individuals don’t unfairly exploit a rebate designed for the middle class.
Government revenues increase, since higher LTCG earners would contribute more by not getting an unwanted tax rebate under section 87A on their regular income.
Final Thoughts: Time for a Rethink:
While the Finance Bill 2025’s intent may have been to plug loopholes, it has ended up creating more inequities than before. By excluding special rate income from rebate eligibility, the government has not only distorted the logic of taxation but also created an unjust system.
If the government truly wants to support small taxpayers, it must rethink this policy. The simplest and fairest solution? Apply a flat ₹60,000 rebate for all incomes up to ₹12 lakh, whether from salary, business, or investments. Anything less would make tax planning a game of loopholes rather than logic. Why should a high-net-worth individual qualify for the rebate while an investor with modest LTCG income gets taxed? A legislative oversight like this needs rectification. The Government must reconsider the implications of this amendment and ensure that tax relief is distributed fairly – rather than disproportionately benefiting a select few.
[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]
