Acknowledgement

I would like to express my heartfelt gratitude and thank my teacher, Dr. Navneet Rana Roy, for
having faith in me and giving me this opportunity to work on the project, “Rebates and Reliefs
under Income Tax Act”. I would also like to thank my family and friends for their continuing
support and help when required. My gratitude also goes out to the staff and administration of
HNLU for the infrastructure in the form of our library and IT Lab that was a source of great help
for the completion of this project.

Taruna Shandilya
Semester – V
Roll No. - 180
Section – B
B.A.-L.L.B (Hons.)

1
 Declaration

I hereby declare that the project work entitled “Rebates and Reliefs under Income Tax Act”
submitted to HNLU, Raipur, is record of an original work done by me under the able guidance of
Dr. Navneet Rana Roy, Faculty Member in Principles of Taxation, HNLU, Raipur.

Taruna Shandilya

Section B

Roll No.-180

Semester V

2
 Table of contents

1. Acknowledgment…………..………………………..………………………….………1

2. Declaration…………………………………………..………………………………….2

3. Research objectives and Methodology….……………...………………………………4

4. Introduction…………………………………………………………………………….5

5. Chapterization:

 Chpt. 1: Tax Rebate under section 87A of Income Tax act….

……………………………………………………………….…………..6
 Chpt. 2: Tax relief under section 89 of Income tax act…..….
……………………………………….………………………...…….9
 Chpt. 3: Comparative study of relief and rebates under income tax act….
…………………………………………………………..……,,,….….…14

6. Conclusion………………………….……………………………………,,,…………..15

7. Bibliography….…………………………………………………………...……………16

3
 RESEARCH OBJECTIVES

1. To find out the meaning of Tax Rebate under section 87A of Income Tax Act.
2. To know about Tax Relief under section 89 of the Income Tax Act.
3. To compare and contrast Tax Rebate and Relief in by description, types etc.

RESEARCH METHODOLOGY

The topic of study is “Tax Rebate and Relief under Income Tax Act”. Given a study of this kind,
a descriptive analytical method has been followed to carry out the study.

Sources of data: Secondary sources of data have been used to carry out the study. These include
reports, research papers and news articles such as:

Report of Tax reforms Committee, (1977).

Websites like www.oecd.org and articles such as:

Relief under section 89, Sensys Blog
http://www.sensystechnologies.com/blog/?p=2132

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 REBATES AND RELIEFS: AN
INTRODUCTION

Rebates and reliefs play an important role in taxation. Granting exemption to taxpayers results in
reduction of effective progressive rates.' In India tax compliance by salaried class is higher when
compared to non-salaried class for the past fifty years. Majority of the non-salaried class reveal
their income only at low-income range.' Hence they are left with the only option of reducing
rigors through rebate and relief available. Reliefs under section 89 are applicable only to salaried
class to protect them from higher rates when salary is received in arrears or in advance.

An element of complexity does get into tax laws when provisions are made to induct various
exemptions, deductions and other reliefs.' Tax rebates are incentives extended to individuals to
enable a part of their earning to be saved. From time immemorial income tax rebate by way of
reduction in the taxable income or tax payable had been granted to ensure that taxpayers do not
resort to lavish and wasteful expense.1

1
Report of Tax reforms Committee, (1977). p.109, para 5.2

5
CHAPTER 1: TAX REBATE UNDER SECTION 87A OF THE INCOME
TAX ACT

87A. An assessee, being an individual resident in India, whose total income does not exceed five
hundred thousand rupees, shall be entitled to a deduction, from the amount of income-tax on his
total income with which he is chargeable for any assessment year, of an amount equal to hundred
per cent of such income-tax or an amount of five thousand rupees, whichever is less.2

EXPLANATION OF THIS SECTION: Section 87A of Income-tax Act, provide for a rebate of
an amount equal to hundred per cent of such income-tax or an amount of Rs. 2000/- (Rs. 5000
from Financial Year 2016-17), whichever is less, from the amount of income-tax to an individual
resident in India whose total income does not exceed five hundred thousand rupees.

 Features of Section 87A of Income-tax Act:

1. This rebate is available only to individual assesses.

2. This rebate is available only to residents. Hence, no rebate for non-residents.
3. Sec.87A provides a tax credit of Rs.50003. It does not mean that the basic exemption limit has
been raised from Rs.2,00,000 to Rs.2,20,000.
4. If the total tax payable is less than Rs. 5000/-, the amount of rebate shall be restricted to the
total tax payable. Hence, the assessee cannot claim refund if his tax liability is less than Rs.5000.
5. The threshold limit of Rs.5,00,000/- is for Net Taxable Income. Say, for example, your CTC is
Rs.6 lakhs & your deductions under sections 80C & 80D amount to Rs.1,00,000, then you can
claim tax credit under section 87A since your net taxable income is Rs.5,00,000 (6 lakhs – 1
lakh).
6. It is clearly evident that this benefit shall not be applicable to a super senior citizen, since he is
already fully exempted up to Rs. 5 lakhs.

2
Section 87A, Income tax act
3
For FY 2016-2017 onwards

6
  Section 87A Income Tax Act Rebate calculation:

1. First of all, gross income will be calculated and from that gross income all possible
deductions and rebates except sec 87A will be deducted. This will be total income on
which normal tax rate will be applicable.

2. From this total income liable to tax, calculate tax in normal course which will be 10%
slab as it is normal rate for total income upto 5,00,000/-.

3. After this rebate of section 87A will be reduced from the tax. It can be 100% of tax or Rs.
5,000/- whichever is less.

4. Calculate education cess and secondary and higher education cess which is 3% on this
amount.

5. Total of tax and cess amount is tax payable by individual.

For example: Let’s assume Mr. A’s total income is 5,20,000/-. He deposited 40,000/- in PPF,
purchased 40,000/- NSC. His children are studying in a big international school and tuition fee
for that is 50,000/- p.a. By all this he can claim deduction of Rs. 1,00,000/- under section 80C.
Now his total income is 5,20,000 – 1,00,000 = 4,20,000/-

Normal tax 10% of (4,20,000-2,00,000 = 2,20,000) is 22,000/-. Now deduct 5,000/- as section
87A Income Tax Rebate. Actual Tax will be Rs. 17,000/-. Tax payer can pay this tax with
education cess and secondary and Higher education cess. These are 3% so cess amount will be
Rs. 510/-. Now total tax payable is Rs. 17,510/-.4

Chart of Amount of Rebate Available to individual resident in India whose total income does not
exceed five hundred thousand rupees:-

S. No. Financial Year Rebate Available

4
Section 87A of Income Tax Act Rebate Rules
http://taxpaisa.com/section-87a-of-income-tax-act-rebate/

7
 1 2016-17 & Subsequent Years unless withdrawn 5000/-

2 2015-16 2000/-

3 2014-15 2000/-

4 2013-14 2000/-

In India, tax rebate is allowed to those individuals whose income falls within the tax slabs that
are modified as per the directions of the government every year. All information about
modifications in the rebate structure is announced in the union budget of the respective year.

CHAPTER 2: TAX RELIEF UNDER SECTION 89 OF THE INCOME TAX

ACT
8
An employee’s tax liability can increase when she receives arrears. However, one can get some
amount of relief under section 89 of the Income-tax Act, 1961. Here is a look at what is covered
under this section, and how one can avail of the relief.

 WHAT IS SECTION 89?

This section, titled “relief when salary, etc., is paid in arrears or in advance”, comes under
chapter VIII (Rebates and Reliefs) of the income-tax Act. According to it, if you get salary in
arrears or advance in a financial year due to which your total income for the year increases,
which in turn increases your taxable income, you can claim for relief under section 89.
According to this section, arrears includes salary/family pension paid in arrears/advance
(additional salary), certain part of gratuity, compensation received on termination of
employment, and commuted pension. The rules apply to both government and private sector
employees.

The receipt of arrears can lead to a higher tax incidence in the hands of the employee as the
amount gets taxed in the year of receipt. Had the employee received this amount in the year(s)
that it pertained to, the additional tax would have been staggered over the years, instead of being
paid as a lump sum. This is where section 89 comes in.

 WHEN CAN RELIEF BE USED?

An individual can avail relief in the following case:

 An individual receives any portion of his salary in arrears or

 Salary received in advance or

 Salary received in the form of profit in lieu of salary

There was a decision of Delhi High Court in the case of CIT v. S.N. Chadha.5 In this
case, their Lordships of the High Court held that the benefit under Section 89(1) was
permissible in respect of payments received by way of profit in lieu of salary under
Section 17(3).

5
CIT VS SN CHADHA, 249 ITR 31

9
  When a salaried employee received gratuity in the following cases

o Where gratuity payable is in respect of past service of 15 years or more

o Where such period is 5 years or more but less than 15 Years

 Compensation received on termination of employment

 Payment received in commutation of pension

 Any other cases where CBDT may allow6

 Relief in respect of salary or family pension received in arrears or in advance [Rule

21A(2)]
The relief on salary received in arrears or in advance is computed in the manner as refined by
rule 21A(2) which is produced as below;

1. Calculate the tax payable on the total income, including the salary received in arrears or
in advance, of the relevant previous year in which the same is received.
1. Calculate the tax payable on the total income, excluding the salary received in arrears or
in advance, of the relevant previous year in which the additional salary is received.

2. Find out the difference between tax at (1) and (2).

3. Compute the tax on the total income after including the salary received in arrears or in
advance in the previous year to which such salary relates.

4. Compute the tax on the total income after excluding the additional salary in the previous
year to which such salary relates.

5. Find out the difference between tax at (4) and (5).

6. Amount of relief: The excess of tax computed at (3) over tax computed at (6)

 Relief in respect of gratuity [Rule 21A(3)]

Relief for gratuity can is claimed if the amount of gratuity received is in excess of gratuity
specified under section 10(10). However no relief is permissible if the taxable gratuity is
received for less than 5 years of service period. The amount of relief is admissible in the as per
following category
6
Relief under section 89, Sensys Blog
http://www.sensystechnologies.com/blog/?p=2132

10
 Where gratuity payable is in respect of past service of 15 years or more

       The amount of relief is calculated as follows:

1. Compute the average rate of tax on the total income including the gratuity in the year of
receipt

2. Find out the tax on gratuity at the average tax rate as computed in (1)

3. Compute the average rate of tax by adding 1/3 gratuity to preceding 3 previous years

4. Find out the average of 3 years average rate as computer in (3) and compute the tax on
gratuity at that rate

5. Relief admissible : difference between (2) and (4)

 Where such period is 5 years or more but less than 15 Years

 The amount of relief for this category , the relief is calculated as on the similar lines of
above with only difference that instead of average of average rates of 3 years, the average
of average rate of 2 years shall be taken by adding ½ of gratuity to each of two preceding
year.

 Relief in respect of compensation on termination of employment [Rule 21A(4)]

If the compensation received by the employee from his current or previous employer at or in
relation with termination of his employment after completion of 3 years of service and
unexpired portion of his term of employment is more than 3 years, the relief is calculated in
the same manner as if gratuity paid to employee in respect of service rendered for a period of
15 years or more.

 Relief in respect of payment of commutation of pension [Rule 21A(5)]

A relief can be claimed in respect of commutation of pension received in excess of limits
specified under section 17(1)(ii). Such relief is computed in the same manner as if gratuity
paid to employee in respect of service rendered for a period of 15 years or more.

 Relief in respect of other payment [Rule 21A(6)]

In respect of any other payment received by employee other than those specified above, the
relief will be granted by the CBDT after examination of circumstances of each case.

11
 Procedure for claiming the tax relief – In order to claim tax relief under the aforesaid
circumstances, the employee should give relevant information in his income tax return.

Basically relief under section 89 is arithmetical. It involves finding out two tax rates.7

CHAPTER 3: COMPARATIVE CHART BETWEEN REBATES AND

RELIEFS UNDER INCOME TAX ACT

Comparison between Income Tax Rebate and Relief:

7
Income tax Relief under Section 89 read with rule under section 21A
http://incometaxtips.in/income-tax-relief-under-section-89-read-with-rule-21a/

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  Tax Rebate Tax Relief

Description The return of excess Any program or

amounts of income tax incentive that reduces
that a taxpayer has paid the amount of tax owed
to the state or federal by an individual or
government throughout business entity.
the past year.
 

Type Refund of tax paid Any relief of tax

How it works Refunds excessively Directly or indirectly

paid tax reduce taxes

Reduction Refunds tax that has Anything that reduces

been paid beforehand the tax that has to be
paid. Can be a
deduction or a credit.

On the basis of Taxes already paid Can be on the basis of

Taxes already paid or to
encourage behaviors
like investment or
parenting. It can also be
on the basis of
expenses, particularly
those incurred to
produce additional
income.

13
 CONCLUSION

After computing tax on total income, the assessee is entitled to rebates and reliefs in accordance
with chapter VIII of the Income-tax Act. The rebates and reliefs are in the nature of direct
reduction of taxes unlike deductions under chapter VIA of the income tax act, which are in the
nature of reduction of income assessable to tax.  Rebates are also known as tax refunds and can
be described as the return of excess amounts of income tax that a taxpayer has paid to the state or
federal government throughout the past year. On the other hand tax relief is  provided to mitigate
the hardships on account of differential rate of  income tax for different years. The procedure for
computing the relief is given under Rule 21A of the Income Tax Rules.

14
Rebates and reliefs seek to modulate the structure to suit the needs of the times by providing
differential tax treatment to various types of income consistent with the policies of the
government. They provide the necessary incentives on a selective basis to certain types of
desirable activities by inducing channelization of savings of the community into selected sectors
of investment. They facilitate achievement of certain basic social and economical objectives.

BIBLIOGRAPHY

 Report of Tax reforms Committee, (1977). p.109, para 5.2

 Section 87A of Income Tax Act Rebate Rules

http://taxpaisa.com/section-87a-of-income-tax-act-rebate/
 Relief under section 89, Sensys Blog
http://www.sensystechnologies.com/blog/?p=2132

 Income tax Relief under Section 89 read with rule under section 21A
http://incometaxtips.in/income-tax-relief-under-section-89-read-with-rule-21a/

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