Revamped framework for granting rebates on income tax to certain individuals Under Clause 156 of Income Tax Bill, 2025 Vs. Section 87 of the Income-tax Act, 1961

Clause 156 Rebate of income-tax in case of certain individuals.

Income Tax Bill, 2025

Introduction

Clause 156 of the Income Tax Bill, 2025, introduces a revamped framework for granting rebates on income tax to certain individuals, marking a significant shift in the legislative approach to tax relief for low and middle-income taxpayers. This clause is poised to replace, or at least substantially modify, the existing rebate mechanisms embedded within the Income-tax Act, 1961, particularly Section 87 and its associated provisions such as Section 87A. The new clause not only raises the rebate threshold but also introduces a tiered structure for higher income brackets, reflecting evolving policy priorities toward greater tax equity and relief for the middle class.

Section 87 of the Income-tax Act, 1961, in contrast, is a general enabling provision that authorizes the deduction of rebates as specified in other sections (notably Section 87A and previously Sections 88, 88A-D, now omitted), but does not itself set out the quantum or eligibility for any particular rebate. This commentary provides a comprehensive analysis of Clause 156, dissects its components, explores its legislative intent, and contrasts it with the existing statutory regime u/s 87, highlighting both the continuities and departures, as well as the practical and policy implications.

Objective and Purpose

Legislative Intent behind Clause 156

The primary objective of Clause 156 is to provide targeted tax relief to resident individual assessees, especially those falling within lower and middle-income categories. The clause seeks to:

• Alleviate the tax burden on individuals with total income not exceeding Rs. 5 lakh, by offering a full rebate up to Rs. 12,500.
• Extend the scope of relief for individuals with higher incomes (up to Rs. 12 lakh and beyond), introducing a progressive and structured rebate system.
• Streamline and clarify the rebate mechanism, moving away from the patchwork of amendments and insertions that have characterized the existing law.

The policy rationale is rooted in promoting tax equity, incentivizing compliance, and providing relief to those most impacted by inflation and rising living costs.

Historical Context and Policy Considerations

Historically, rebates and reliefs in Indian income tax law have evolved through various provisions, with Section 87 serving as the legislative gateway for specific rebate sections (e.g., 87A, 88, etc.). Over time, as the tax base expanded and socio-economic conditions changed, the quantum and eligibility for rebates have been periodically revised. The latest proposal under Clause 156 reflects a recognition of the need for a more robust and inclusive rebate regime, particularly in light of contemporary economic challenges and the policy objective of bolstering disposable income among the lower and middle classes.

Detailed Analysis of Clause 156 of the Income Tax Bill, 2025

Rebate for Individuals with Income up to Rs. 5 Lakh

Clause 156(1) provides a direct successor to the current Section 87A rebate, but with legislative clarity and consolidation within the new Bill.

The key features are:

• Eligibility: Only resident individuals with total income not exceeding Rs. 5 lakh are eligible.
• Quantum: The rebate is capped at the lower of 100% of the income tax payable or Rs. 12,500.
• Computation: The rebate is applied to the tax computed before the deduction under this section, ensuring that the relief is calculated on gross tax liability.

The practical effect is that individuals with income up to Rs. 5 lakh incur zero tax liability, as the entire tax is offset by the rebate, provided the tax does not exceed Rs. 12,500.

Enhanced Rebate for Higher Income Brackets

Clause 156(2) introduces a novel feature absent in the current law. This structure introduces a two-tiered rebate system:

• For incomes up to Rs. 12 lakh: A rebate of up to Rs. 60,000 or the full tax payable, whichever is less.
• For incomes above Rs. 12 lakh: The rebate tapers off, as it is calculated as the tax payable reduced by the excess of total income over Rs. 12 lakh, effectively phasing out the benefit for higher incomes.

This approach is a significant expansion of the rebate regime, aiming to provide relief to a broader segment of taxpayers, particularly the middle class, while ensuring that the benefit is progressively reduced for higher earners.

Cap on Deduction 

Clause 156(3) states, This is an anti-abuse and clarification provision, ensuring that the rebate cannot exceed the actual tax liability computed at the prescribed rates, thereby preventing any negative tax (refunds exceeding tax paid) and maintaining the integrity of the tax base.

Practical Implications

Impact on Taxpayers

The expanded rebate regime will have a substantial impact on resident individuals, especially those in the Rs. 5-12 lakh income bracket. Key implications include:

• Increased Disposable Income: Taxpayers in the middle-income segment will see a significant reduction in tax outgo, boosting consumption and savings.
• Simplification: The consolidation of rebate provisions may reduce compliance burdens and litigation.
• Equity: The progressive phase-out ensures that relief is targeted and does not disproportionately benefit higher-income individuals.

Administrative and Compliance Considerations

• Procedural Simplicity: The clear thresholds and amounts facilitate easier computation by taxpayers and tax authorities.
• Potential for Disputes: As with any new provision, initial years may see interpretative disputes, especially regarding the calculation of the phase-out for incomes just above Rs. 12 lakh.
• Integration with Withholding and Advance Tax: Employers and deductors will need to update payroll and TDS systems to account for the new rebate structure.

Comparative Analysis with Section 87 of the Income-tax Act, 1961

Structure and Scope

Section 87, as it currently stands, is a general provision authorizing the allowance of rebates as specified in other sections (notably Section 87A, and previously, now-omitted Sections 88, 88A-D, etc.). Its language is procedural and enabling, rather than substantive. The key features are:

• Delegation: Section 87 does not itself stipulate any quantum or eligibility for rebates but refers to other sections for such details.
• Aggregation Cap: The aggregate rebate cannot exceed the tax computed before deductions.
• Evolution: Over time, several specific rebate sections have been inserted and omitted, reflecting shifting policy priorities.

In contrast, Clause 156 of the 2025 Bill is a substantive provision, directly specifying eligibility, quantum, and computation of rebates within the same clause, thereby enhancing clarity and legislative economy.

Eligibility and Quantum of Relief

Section 87, via Section 87A (as currently operative), provides a rebate of up to Rs. 12,500 for resident individuals with income not exceeding Rs. 5 lakh. There is no provision for higher income brackets. Clause 156, however, introduces a tiered system:

• Section 87A (via Section 87): Rebate up to Rs. 12,500 for income up to Rs. 5 lakh.
• Clause 156: Same rebate for income up to Rs. 5 lakh, but an enhanced rebate of up to Rs. 60,000 for income up to Rs. 12 lakh, and a phase-out for income above Rs. 12 lakh.

This represents a major policy shift, extending relief to the middle class, which was previously excluded.

Legislative Technique and Clarity

Section 87's approach of referencing other sections has led to a somewhat fragmented and complex rebate regime, with multiple amendments, insertions, and omissions over the years. Clause 156 consolidates the rebate framework in a single provision, reducing interpretative complexity and legislative clutter.

Policy and Equity Considerations

The existing regime u/s 87/87A is criticized for its abrupt cut-off at Rs. 5 lakh, creating a "cliff effect" where a small increase in income can result in a disproportionately higher tax liability. Clause 156 addresses this by phasing out the rebate for higher incomes, thereby smoothing the marginal rate and enhancing horizontal equity among taxpayers.

Comparison with International Practice

Many jurisdictions employ phased rebates or tax credits that gradually reduce as income rises, to avoid sharp cut-offs and to better target relief. Clause 156's design aligns with such best practices, whereas the current Section 87A regime is more rigid.

Potential Issues and Areas for Reform

While Clause 156 is a marked improvement, certain issues merit attention:

• Complexity at the Margin: The phase-out formula for incomes above Rs. 12 lakh, though equitable, may introduce computational complexity and potential disputes.
• Interaction with Surcharge and Cess: The provision should clarify whether the rebate applies before or after surcharge and cess, to prevent litigation.
• Indexation: The income thresholds and rebate amounts could be indexed to inflation to maintain their real value over time.

Conclusion

Clause 156 of the Income Tax Bill, 2025, represents a significant evolution in the tax rebate regime for individuals, moving from a narrow, rigid rebate u/s 87A to a progressive, tiered system that better addresses the needs of the middle class. Its design is more equitable, administratively simpler, and aligned with international best practices. While certain interpretative and computational issues may arise, the overall effect is to enhance tax relief, promote compliance, and reduce legislative complexity. The comparison with  Section 87 of the Income-tax Act, 1961 underscores the shift from a fragmented, reference-based approach to a consolidated, substantive provision, reflecting the maturing of India's tax policy in response to changing socio-economic realities.

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Full Text:

Clause 156 Rebate of income-tax in case of certain individuals.

 

Dated: 21-4-2025