Enhanced Rebate Under Section 87A: Budget 2025-26

 Enhanced Rebate Under Section 87A: Budget 2025-26

  Sunday, February 2, 2025

The Indian government has proposed significant changes to Section 87A in Budget 2025-26, bringing relief to taxpayers under the new tax regime. These modifications aim to increase the tax rebate limit, allowing more individuals to benefit from reduced tax liabilities. Let’s explore the details of the new provisions and their implications.

Current Provisions of Section 87A

Under the existing provisions of Section 87A of the Income Tax Act:

• An individual resident in India with a total income of up to ₹5,00,000 (under both the old and new tax regimes) is eligible for a 100% rebate on income tax liability, effectively making their tax liability nil.
• Under the new tax regime (Section 115BAC) introduced in Finance Act 2023, individuals with income up to ₹7,00,000 were eligible for a rebate of up to ₹25,000 (i.e., income tax payable up to ₹7,00,000 was fully rebated).
• A marginal relief mechanism was in place for those exceeding ₹7,00,000 by a small amount, ensuring that the additional tax payable did not exceed the excess income beyond ₹7,00,000.

Proposed Changes in Budget 2025-26

The new budget proposes to enhance the rebate limit under the new tax regime while keeping the existing rebate under the old regime unchanged. The key changes include:

1. Enhanced Income Limit for Rebate:
   • The income limit for availing the rebate has been increased from ₹7,00,000 to ₹12,00,000 under the new tax regime.
2. Increased Rebate Amount:
   • The maximum rebate available has been increased from ₹25,000 to ₹60,000.
3. Marginal Relief for Income Above ₹12,00,000:
   • If an individual's income slightly exceeds ₹12,00,000, a marginal relief mechanism ensures that the additional tax payable does not exceed the income beyond ₹12,00,000.
4. Exclusion of Special Income:
   • Similar to previous provisions, rebate under Section 87A is not available for incomes taxed at special rates, such as capital gains under Section 111A and 112.

Key Takeaways

• Greater Tax Relief: More individuals earning up to ₹12,00,000 will benefit from reduced tax liability.
• Encouragement for New Regime: The increase in rebate makes the new tax regime more attractive for middle-income individuals.
• Marginal Relief Benefits: Those just above the ₹12,00,000 mark won’t face a disproportionate tax burden.
• Exclusion of Special Taxed Income: Taxpayers with capital gains or other special-rate income should plan accordingly, as these do not qualify for the rebate.