When it comes to personal taxation, understanding the various sections of the Income Tax Act that offer rebates and reliefs is essential. Section 87 of the Income Tax Act is a crucial provision that grants taxpayers specific rebates, reducing their overall tax liability. In this blog, we will delve into Section 87 of the Income Tax Act, its legislative history, and the changes introduced by the Finance Act, 2023. Additionally, we will explore its connection with Section 87A and Section 88E.
What is Section 87 of the Income Tax Act?
Section 87 was introduced through the Finance Act, 1990 and became effective from April 1, 1991. This section allows for a rebate to be applied to the income tax liability of an individual. In essence, Section 87 provides relief by reducing the amount of income tax an individual is liable to pay, subject to the provisions outlined in Sections 87A and 88E.
Key Provisions of Section 87:
- Section 87(1): In computing the amount of income tax payable on the total income of an assessee for any assessment year, a rebate shall be allowed from the calculated income tax (before any other deductions are applied).
- Section 87(2): Places a limit on the aggregate rebate that can be claimed, ensuring that it does not exceed the total amount of income tax payable.
Historical Amendments to Section 87
Since its inception in 1991, Section 87 has undergone several amendments through various Finance Acts. Here is a summary of the significant changes:
- Finance Act, 1992: Amended both Section 87(1) and Section 87(2), effective from April 1, 1993.
- Finance Act, 2000: Introduced further changes, effective from April 1, 2001, updating the rebate calculation methods.
- Finance Act, 2004: Made additional amendments, effective from April 1, 2005, to modernize the rebate provisions.
- Finance Act, 2013: Significant changes were made to align the section with newer provisions, effective from April 1, 2014.
- Finance Act, 2023: The most recent amendments effective from April 1, 2023, further streamline the provisions and limit the applicability of earlier rebate sections.
The Evolution of Rebates: From Sections 88 to 87A
Prior to 1968, rebates were governed by Sections 88, 88A, 88B, 88C, and 88D. However, these sections were gradually phased out or became non-operative over time. Their provisions were later consolidated under Section 87A and Section 88E.
- Section 87A: Allows for a rebate on income tax for individuals whose taxable income does not exceed a specified threshold.
- Section 88E: Pertains to a rebate for securities transaction tax, although this section has been non-operative since the assessment year 2009-10.
Amendments by the Finance Act, 2023
The Finance Act, 2023 has simplified Section 87 by removing outdated references to Sections 88, 88A, 88B, 88C, and 88D, which had become non-operative. As a result, from the assessment year 2023-24 onward, Section 87 is now focused exclusively on Section 87A and Section 88E (despite its non-applicability).
Key Changes in the Finance Act, 2023:
- Section 87(1) and Section 87(2) now refer only to Section 87A and Section 88E, streamlining the rebate provisions.
- The amendments ensure that taxpayers are not confused by references to outdated sections that no longer apply.
How Section 87A Impacts Taxpayers Today
Section 87A continues to be a crucial provision for taxpayers with lower income levels. For the assessment year 2023-24, Section 87A allows individuals with a total taxable income of up to ₹5 lakh to claim a rebate of up to ₹12,500. This rebate effectively reduces the tax liability to zero for eligible taxpayers.
Who Can Claim the Rebate Under Section 87A?
- Resident individuals whose taxable income does not exceed ₹5 lakh are eligible for the rebate.
- The rebate is deducted from the total tax liability before the application of education cess or surcharge.
Example of Rebate Under Section 87A:
Suppose an individual has a taxable income of ₹4.5 lakh for the assessment year 2023-24. The income tax calculated before applying the rebate would be around ₹12,500. Applying Section 87A, the individual’s tax liability will be reduced to zero.
FAQs on Section 87 of the Income Tax Act
Q1. What is Section 87 of the Income Tax Act?
Section 87 allows for a rebate on income tax, calculated on the total income of an assessee before any other deductions are applied, subject to provisions in Sections 87A and 88E.
Q2. What is the latest amendment to Section 87?
The Finance Act, 2023 amended Section 87 by omitting outdated references to Sections 88, 88A, 88B, 88C, and 88D, focusing solely on Section 87A and Section 88E.
Q3. Who can claim the rebate under Section 87A?
Resident individuals with a taxable income of up to ₹5 lakh are eligible to claim a rebate under Section 87A, reducing their tax liability to zero.
Q4. Is Section 88E still applicable?
No, Section 88E has been non-operative since the assessment year 2009-10, though it remains in the statutory language of Section 87.
Q5. How has the Finance Act, 2023 impacted Section 87?
The Finance Act, 2023 has streamlined the provisions of Section 87 by removing references to outdated sections, simplifying the rebate calculation for taxpayers.
Conclusion: Streamlined Rebates Under Section 87 of the Income Tax Act
The legislative changes brought about by the Finance Act, 2023 have made Section 87 more focused and relevant to today’s taxpayers. With the removal of obsolete references to sections like 88 and 88A, the focus is now on rebates under Section 87A and Section 88E. Although Section 88E is no longer applicable, it remains part of the statutory language for now.
For most taxpayers, the most relevant provision is Section 87A, which continues to offer substantial relief to low-income earners. As we move forward, it’s essential to stay informed about the latest amendments to ensure you’re maximizing your eligible deductions and rebates.
