Relief to resident individual taxpayers with lower and middle incomes by reducing their effective tax liability : Clause 156 of the Income Tax Bill, 2025 Vs Section 87A of the Income Tax Act, 1961

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

Income Tax Bill, 2025

1. Introduction

Clause 156 of the Income Tax Bill, 2025, and Section 87A of the Income Tax Act, 1961, both address the provision of income tax rebates to certain individual taxpayers in India. These statutory provisions are designed to provide relief to resident individual taxpayers with lower and middle incomes by reducing their effective tax liability. Over the years, the quantum and eligibility criteria for such rebates have evolved, reflecting both fiscal policy objectives and socio-economic considerations. The 2025 Bill proposes to consolidate, clarify, and in some respects, expand the scope of these rebates, particularly in the context of the new tax regime and changing economic realities.

This commentary provides a comprehensive analysis of Clause 156, examining its structure, objectives, and practical implications, followed by a detailed comparative analysis with the existing Section 87A. The analysis explores legislative intent, interpretative nuances, and the broader impact on taxpayers and the tax administration.

2. Objective and Purpose

The core objective of both Clause 156 and Section 87A is to provide tax relief to resident individual taxpayers with limited incomes, thereby enhancing tax equity and incentivizing compliance. The rationale is grounded in the principle of ability to pay, recognizing that individuals at lower income thresholds should not be unduly burdened by direct taxes. Additionally, these rebates serve as a tool for the government to stimulate consumption and support economic growth by increasing disposable income among the lower and middle-income segments.

Historically, the rebate provision has also been used as a mechanism to align the personal income tax regime with inflationary trends and changing economic conditions. The periodic revision of thresholds and rebate amounts demonstrates the legislature's responsiveness to socio-economic shifts, as well as its attempt to balance revenue considerations with taxpayer welfare.

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

a. Structure and Key Provisions

• Sub-clause (1): Provides that a resident individual assessee is entitled to a deduction of 100% of income-tax payable or Rs. 12,500, whichever is less, from the income-tax chargeable on total income for any tax year, provided the total income does not exceed Rs. 5,00,000.
• Sub-clause (2): Introduces a higher threshold for taxpayers opting for taxation u/s 202(1) (presumably the new tax regime), allowing:
  • (a): For total income not exceeding Rs. 12,00,000, a deduction of 100% of income-tax payable or Rs. 60,000, whichever is less.
  • (b): For total income exceeding Rs. 12,00,000, a deduction equal to the income-tax payable on the total income, reduced by the amount by which total income exceeds Rs. 12,00,000.
• Sub-clause (3): Caps the deduction under sub-clause (2) to not exceed the income-tax payable as per rates u/s 202(1).

b. Interpretation and Legal Nuances

Clause 156 is structured to provide a two-tiered rebate system:

1. General Rebate: For all resident individuals with total income up to Rs. 5,00,000, regardless of the tax regime, the rebate is up to Rs. 12,500 or 100% of the tax liability, whichever is less. This provision continues the long-standing policy of exempting low-income earners from income tax.
2. Enhanced Rebate u/s 202(1): For those opting for the regime u/s 202(1), the rebate threshold is significantly increased to Rs. 12,00,000, with a maximum rebate of Rs. 60,000. For incomes marginally above Rs. 12,00,000, a 'tapering' mechanism is introduced, where the rebate decreases as income increases beyond the threshold, thus preventing a sudden 'cliff effect' where a marginal increase in income would otherwise result in a disproportionate increase in tax liability.

The cap in sub-clause (3) ensures that the rebate cannot exceed the actual tax liability, thereby preventing any situation where a taxpayer receives a refund in excess of taxes due merely by operation of the rebate.

c. Legislative Clarity and Potential Issues

Clause 156 is drafted with greater clarity compared to its predecessor, explicitly addressing the treatment of incomes slightly above the threshold and introducing a smooth phase-out of the rebate. This addresses a frequent criticism of earlier rebate provisions, where a minor increase in income could result in a large increase in tax liability due to the abrupt withdrawal of the rebate.

However, certain terms, such as references to "Section 202(1)," require cross-referencing with the main Bill to ascertain the precise scope and applicability. Furthermore, the mechanics of the 'tapering' provision in sub-clause (2)(b) may require further illustration or guidance to ensure uniform application.

4. Practical Implications

a. Impact on Taxpayers

The primary beneficiaries of Clause 156 are resident individual taxpayers with incomes up to Rs. 5,00,000 (all regimes) and up to Rs. 12,00,000 (under the new regime). For the first group, the provision effectively ensures zero tax liability, maintaining continuity with past practice. For the second group, the enhanced rebate significantly reduces the tax burden for middle-income earners, aligning with the government's stated objective of rationalizing personal taxation and increasing net disposable income.

The introduction of a higher rebate threshold under the new regime is likely to boost the attractiveness of the simplified tax regime, potentially increasing its adoption. The tapering mechanism for incomes above Rs. 12,00,000 mitigates the risk of sharp increases in tax liability, promoting fairness and predictability.

b. Compliance and Administrative Considerations

From an administrative perspective, the clear thresholds and formula-based approach simplify the computation of tax liability and reduce disputes. The explicit cap on the rebate prevents over-claims and potential revenue leakage. However, the effective implementation of the tapering mechanism will require robust systems and clear guidance to avoid misinterpretation.

c. Broader Economic and Policy Impacts

By increasing the rebate threshold and amount, Clause 156 is likely to increase disposable income among the middle class, thereby stimulating consumption. It also reduces the effective tax rate for a significant segment of taxpayers, which may have implications for direct tax collections. The provision may also contribute to increased voluntary compliance by making the tax regime more equitable and less onerous for lower and middle-income earners.

5. Comparative Analysis with Section 87A of the Income Tax Act, 1961

a. Structure and Evolution of Section 87A

Section 87A was introduced by the Finance Act, 2013, and has since undergone several amendments to reflect changing policy priorities and economic realities. The current version, as amended by the Finance Act, 2025 (effective from AY 2026-27), provides:

• For resident individuals with total income not exceeding Rs. 5,00,000, a rebate of 100% of income-tax payable or Rs. 12,500, whichever is less.
• For those opting for taxation u/s 115BAC(1A) (the new regime), and with total income not exceeding Rs. 12,00,000, a rebate of 100% of income-tax payable or Rs. 60,000, whichever is less.
• For incomes exceeding Rs. 12,00,000, a deduction equal to the amount by which the income-tax payable exceeds the excess of total income over Rs. 12,00,000.
• The rebate cannot exceed the tax payable as per the rates u/s 115BAC(1A).

The provision has been periodically updated to increase the threshold and quantum of rebate, reflecting inflation and the government's desire to provide greater relief to the lower and middle-income groups.

b. Comparative Table of Key Features

Feature	Clause 156 (Income Tax Bill, 2025)	Section 87A (Income Tax Act, 1961, as amended)
Eligibility	Resident individual assessee	Resident individual assessee
General Rebate Threshold	Rs. 5,00,000	Rs. 5,00,000
General Rebate Amount	100% of tax or Rs. 12,500, whichever is less	100% of tax or Rs. 12,500, whichever is less
Enhanced Rebate (New Regime)	Income up to Rs. 12,00,000: 100% of tax or Rs. 60,000, whichever is less	Income up to Rs. 12,00,000: 100% of tax or Rs. 60,000, whichever is less
Tapering Mechanism	For income above Rs. 12,00,000: deduction = tax payable - (income - Rs. 12,00,000)	For income above Rs. 12,00,000: deduction = tax payable - (income - Rs. 12,00,000)
Rebate Cap	Cannot exceed tax payable as per Section 202(1)	Cannot exceed tax payable as per Section 115BAC(1A)

c. Key Similarities

• Both provisions target resident individuals and provide a 100% rebate up to a specified maximum amount for incomes not exceeding Rs. 5,00,000.
• Both introduce an enhanced rebate for the new tax regime, with a higher threshold and amount.
• Both utilize a tapering mechanism for incomes marginally above the enhanced threshold, ensuring a smooth withdrawal of the rebate.
• Both cap the rebate to actual tax payable, preventing negative tax liability.

d. Key Differences and Legislative Improvements

• Codification and Structure: Clause 156 consolidates and streamlines the rebate provisions, providing clearer drafting and organization. The structure is more intuitive, with sub-clauses clearly delineating the general and enhanced rebates.
• Terminology and Cross-Referencing: Clause 156 refers to Section 202(1) for the new regime, whereas Section 87A refers to Section 115BAC(1A). The substantive effect is similar, but the cross-referencing reflects the restructuring of the tax code in the new Bill.
• Legislative Clarity: The 2025 Bill's drafting addresses ambiguities present in earlier versions of Section 87A, particularly concerning the computation of the tapering rebate. Clause 156's language is more accessible and less prone to misinterpretation.
• Policy Continuity: Both provisions reflect the government's ongoing commitment to providing relief to lower and middle-income taxpayers, with the 2025 Bill essentially codifying and refining the approach introduced in recent amendments to Section 87A.

e. Potential Areas of Ambiguity or Concern

• Interaction with Other Provisions: The rebate is allowed "before allowing the deduction under this section," which is consistent with prior practice, but requires careful sequencing in tax computations. Clear guidance will be necessary to ensure uniform application.
• Definition of "Total Income": As with all such provisions, the precise definition and computation of "total income" is critical, especially where multiple deductions or exemptions may apply.
• Transition and Overlap: With the introduction of the new Bill, there may be transitional issues for taxpayers and practitioners accustomed to the prior regime. Adequate outreach and clarification will be necessary.

6. Practical Implications and Stakeholder Impact

a. For Individual Taxpayers

• Ensures zero tax liability for incomes up to Rs. 5,00,000, irrespective of the tax regime.
• Provides substantial relief for middle-income earners under the new regime, with a maximum rebate of Rs. 60,000 up to Rs. 12,00,000.
• Reduces the abrupt withdrawal of benefits, thanks to the tapering mechanism, thus promoting fairness.
• May influence taxpayers to opt for the new regime, given the higher rebate threshold and amount.

b. For Tax Administration

• Simplifies the process of tax computation and reduces the likelihood of disputes over rebate eligibility and amount.
• Requires robust systems to handle the computation of the tapering rebate for incomes just above the threshold.
• May necessitate updated forms, software, and guidance to ensure smooth implementation.

c. For Policy and Revenue

• Likely to increase disposable income among lower and middle-income groups, potentially boosting consumption and economic activity.
• May have a moderate impact on direct tax collections, but aligns with the government's stated policy objectives.
• Supports the transition towards a simplified, equitable, and modern personal tax regime.

7. Conclusion

Clause 156 of the Income Tax Bill, 2025, represents a logical evolution and consolidation of the rebate provisions previously found in Section 87A of the Income Tax Act, 1961. By maintaining the existing relief for low-income earners and significantly enhancing the rebate under the new tax regime, the provision furthers the objectives of equity and taxpayer welfare. The adoption of a tapering mechanism for the withdrawal of the rebate is a notable improvement, addressing previous criticisms and aligning with global best practices.

The practical impact will be significant for millions of taxpayers, particularly those in the middle-income bracket, and is likely to make the new tax regime more attractive. From a legislative perspective, Clause 156 exemplifies clarity, accessibility, and responsiveness to stakeholder needs. Future reforms may focus on further rationalizing the tax structure and ensuring seamless implementation, but the current provision marks a substantial step forward in the evolution of personal income tax law in India.

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Full Text:

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

 

Dated: 22-4-2025