Bunching of Salary Income and Tax Rebates : Clause 157 of Income Tax, Bill 2025 Vs. Section 87A of Income-tax Act, 1961

Clause 157 Relief when salary, etc., is paid in arrears or in advance.

Income Tax Bill, 2025

Introduction

Clause 157 of the Income Tax Bill, 2025, and Section 87A of the Income-tax Act, 1961, both serve as statutory mechanisms for providing relief to taxpayers, albeit in different contexts. Clause 157 addresses relief in cases where salary or similar receipts are paid in arrears or advance, potentially resulting in higher tax liability due to bunching of income. Section 87A, on the other hand, provides a direct rebate of income-tax for certain individual taxpayers, primarily as a measure of tax relief for low and middle-income earners. Both provisions are significant in the broader context of equitable tax administration and the policy objective of preventing undue tax hardship due to the timing of income receipts or the level of income.

This commentary provides a comprehensive analysis of Clause 157 of the Income Tax Bill, 2025, followed by a detailed comparative analysis with Section 87A of the Income-tax Act, 1961. The analysis covers legislative intent, structural elements, operational mechanisms, practical implications, and the interplay between these provisions within the Indian tax framework.

Objective and Purpose

Clause 157 is designed to address the issue of "bunching" of income, wherein an assessee receives salary, family pension, or similar receipts in arrears or advance, resulting in an artificial inflation of income in a particular tax year. This can push the taxpayer into higher tax brackets, leading to a greater tax liability than would have arisen had the income been received in the appropriate years. The legislative intent behind Clause 157 is to ensure that taxpayers are not penalized for the timing of such receipts, and to provide a mechanism for equitable tax computation.

Section 87A aims to provide direct tax relief to individual resident taxpayers with income below a specified threshold. The provision operates as a rebate, reducing the tax liability of eligible individuals, and is periodically revised to reflect changing economic conditions and policy priorities. The intent is to offer targeted relief to low and middle-income earners, enhance tax equity, and promote compliance by reducing the tax burden for these segments.

Detailed Analysis of Clause 157 of the Income Tax Bill, 2025

1. Scope and Applicability

Clause 157(1) applies to situations where an assessee's total income is assessed at a higher rate due to the receipt of:

• (a) Arrear or advance salary;
• (b) Salary for more than twelve months in one tax year;
• (c) Payments in the nature of "profits in lieu of salary" u/s 18(1);
• (d) Arrears of "family pension" as defined in section 93(1)(d).

The provision is triggered only when the bunching of income results in the assessee being taxed at a higher rate than would have applied if the income had been received in the relevant years.

2. Relief Mechanism

The relief is not automatic; the assessee must make an application to the Assessing Officer (AO). The AO is then empowered to grant relief as prescribed by the rules. The clause does not specify the quantum or method of relief, delegating these aspects to the rules to be framed under the Act. This approach allows flexibility and administrative discretion in determining the precise manner of relief.

The underlying principle is to ensure that the tax liability is computed as if the income had been received in the correct years, thereby neutralizing the impact of bunching. This is consistent with the doctrine of equity in taxation, ensuring that taxpayers are not disadvantaged by circumstances beyond their control.

3. Exclusion of Relief 

Clause 157(1) introduces an important limitation: no relief shall be granted on any income for which a deduction has already been claimed by the assessee u/s 19(1) (Table: Sl. No. 12) for any amount mentioned therein, for such or any other tax year. This anti-abuse provision prevents double benefit, ensuring that the taxpayer cannot claim both a deduction and relief for the same income, thereby safeguarding the revenue.

4. Procedural Aspects

The requirement for an application to the AO introduces an element of administrative oversight and ensures that relief is granted only in genuine cases. The AO's discretion is guided by the rules, which are expected to lay down the method of computation and the documentation required. This procedural safeguard is essential to prevent misuse and to ensure uniformity in the grant of relief.

5. Interpretation and Potential Ambiguities

While the clause is broadly worded, certain ambiguities may arise in practice:

• Definition of "arrears" and "advance" in specific employment contexts;
• The scope of "profits in lieu of salary" and its overlap with other provisions;
• Interaction with deductions under other sections (e.g., section 19(1));
• Potential disputes on the computation of relief, especially in complex cases involving multiple years and varying tax rates.

These ambiguities are likely to be addressed through rules, departmental clarifications, or judicial interpretation over time.

Practical Implications of Clause 157

1. Impact on Taxpayers

Clause 157 offers significant relief to salaried employees and pensioners who receive arrears or advance payments due to administrative delays, retrospective pay revisions, or court awards. Without such a provision, these taxpayers could face disproportionately high tax liabilities, undermining the principle of fairness in taxation.

2. Compliance and Administrative Considerations

The application-based mechanism requires taxpayers to be proactive and well-informed. It also places an administrative burden on the tax authorities to process applications and determine relief in accordance with the rules. Efficient implementation will require clear guidelines, robust IT systems, and taxpayer education.

3. Anti-abuse Safeguards

The exclusion of relief where deductions have already been claimed is a critical safeguard against double-dipping. It reflects a balanced approach, granting relief only where warranted and preventing revenue leakage.

4. Broader Policy Considerations

Clause 157 aligns with international best practices, where relief for bunching of income is a recognized principle in tax administration. It also supports the government's policy objective of promoting taxpayer equity and minimizing hardship due to administrative or systemic delays in salary payments.

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

1. Scope and Beneficiaries

Section 87A is targeted at individual resident taxpayers with income below a specified threshold. It provides a direct rebate from the tax payable, thereby reducing the effective tax liability for low and middle-income earners.

In contrast, Clause 157 is not income-threshold based; it applies to any assessee facing higher tax due to the timing of salary or pension receipts. While Section 87A is a universal relief for eligible individuals, Clause 157 is situational, triggered by specific events (arrears/advance payments).

2. Mechanism of Relief

Section 87A operates as a tax rebate, i.e., a direct deduction from the calculated tax liability. The quantum of relief is clearly defined: the lesser of the total tax payable or a specified maximum amount (currently Rs. 12,500 under the old regime Rs. 60,000 under the new regime as per the latest amendments).

Clause 157, on the other hand, provides relief by recalculating the tax as if the income had been received in the relevant years, with the precise computation method delegated to the rules. The relief is not a fixed amount but is determined by comparing the tax payable under actual and notional scenarios.

3. Policy Rationale

The rationale for Section 87A is socio-economic: to alleviate the tax burden for individuals with modest incomes and to enhance progressivity in the tax system.

Clause 157 is driven by the principle of equity in timing: to prevent taxpayers from being penalized for the timing of income, which may be outside their control.

4. Administrative Process

Section 87A is applied automatically during tax computation; no separate application is required. This ensures simplicity and widespread benefit.

Clause 157 requires a formal application to the AO, introducing an additional compliance step and administrative discretion.

5. Interplay and Distinctions

While both provisions provide tax relief, they operate independently and serve different policy objectives. An individual could, in theory, benefit from both: Section 87A for low income and Clause 157 for relief due to arrears/advance salary, provided the relevant conditions are met and there is no overlap with deductions under other sections.

6. Evolution and Amendments

Section 87A has been periodically amended to adjust the income threshold and the quantum of rebate, reflecting inflation, policy priorities, and the evolving socio-economic landscape. The latest amendments (effective from AY 2026-27) have increased the threshold and the amount of rebate under the new regime, indicating a policy shift towards higher relief for middle-class taxpayers.

Clause 157, being newly proposed in the Income Tax Bill, 2025, is likely to evolve as its practical implementation reveals challenges and as the rules are framed.

Conclusion

Clause 157 of the Income Tax Bill, 2025, is a significant reform aimed at ensuring equitable tax treatment for taxpayers affected by the timing of salary and pension receipts. Its application-based mechanism, subject to prescribed rules and anti-abuse safeguards, reflects a nuanced approach to taxpayer relief. Section 87A, meanwhile, continues to serve as a cornerstone of tax relief for individual residents, with its scope and quantum periodically updated to reflect policy priorities.

The two provisions, while distinct in their operation and objectives, collectively contribute to a more equitable and responsive tax system. Effective implementation of Clause 157 will require clear rules, administrative capacity, and taxpayer awareness. Ongoing monitoring, feedback from stakeholders, and possible judicial clarifications will be essential to address ambiguities and ensure that the intended relief is realized in practice.

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Full Text:

Clause 157 Relief when salary, etc., is paid in arrears or in advance.

 

 

Dated: 21-4-2025