Tax rebates and reliefs play a crucial role in reducing the overall tax liability for individuals in India. Sections 87A, 89, and 90 of the Income Tax Act, 1961 are particularly relevant for taxpayers looking to optimize their tax outgo. Each section caters to different types of reliefs, from general rebates for low-income earners to reliefs for salary arrears and relief on foreign income to avoid double taxation. Here’s a comprehensive guide to understanding and utilizing these sections effectively.
1. Section 87A – Tax Rebate for Low-Income Taxpayers
Section 87A offers a tax rebate for resident individuals whose total income is below a specified limit. This rebate helps reduce the tax payable for low-income earners, ultimately bringing down their tax burden.
Key Features of Section 87A
- Eligibility: The rebate is available only to resident individuals (not applicable to non-residents or corporate taxpayers).
- Income Limit: The rebate is applicable if the taxpayer’s total income does not exceed ₹5 lakh for the financial year.
- Rebate Amount: Eligible taxpayers can claim a maximum rebate of â‚ą12,500 or the total tax payable, whichever is lower.
For example, if your total income is â‚ą4.5 lakh, and the tax calculated is â‚ą10,000, you can claim the entire â‚ą10,000 as a rebate under Section 87A, making your tax liability zero. This rebate applies to both the old and new tax regimes.
How Section 87A Works
- The rebate is applied after calculating the tax on income according to slab rates but before adding any cess (like health and education cess).
- This rebate effectively reduces the tax to zero if the total tax liability is less than or equal to â‚ą12,500 for individuals with income up to â‚ą5 lakh.
2. Section 89 – Relief on Salary Arrears and Advance Payments
Section 89 provides relief to taxpayers who have received salary arrears, advance salary, or family pension arrears. Receiving income in lumpsum (especially for previous years) can push the taxpayer into a higher tax slab, resulting in a higher tax burden. Section 89 helps mitigate this by allowing a tax relief adjustment.
Key Features of Section 89
- Purpose: To avoid an undue tax burden due to income bunching (lump sum payments from past years).
- Eligible Income: Salary arrears, advance salary, and family pension arrears qualify for relief under Section 89.
How to Calculate Relief Under Section 89
- Calculate Tax for Each Year Separately: Calculate the total tax payable as if the arrears or advance had been received in the respective years (i.e., in the years when the income was actually earned).
- Calculate Tax for the Year of Receipt: Calculate the total tax payable in the year of receipt, including arrears or advances.
- Determine the Difference: Calculate the difference in tax liability for each year, comparing tax with and without the arrears.
- Claim Relief: The total difference calculated for each year is the relief amount under Section 89.
Example of Section 89 Relief Calculation
Assume you received â‚ą2 lakh in arrears during the financial year 2023-24, which was meant for the year 2021-22.
- Calculate the tax for both 2021-22 and 2023-24 with and without arrears.
- Subtract the tax calculated for 2021-22 without arrears from the tax calculated with arrears for that year.
- The result will be the amount eligible for relief under Section 89, reducing the current year’s tax burden.
Filing Form 10E for Section 89
To claim relief under Section 89, taxpayers are required to submit Form 10E online on the Income Tax Department’s portal. Failure to file Form 10E may lead to denial of the relief when processing the income tax return, so it is essential for taxpayers claiming arrears or advances to complete this form.
3. Section 90 – Relief from Double Taxation on Foreign Income
Section 90 provides relief to residents of India who have foreign-sourced income that has been taxed in another country. This section helps avoid double taxation, where an individual pays tax on the same income in both India and the foreign country.
Eligibility for Relief Under Section 90
- The relief is available to Indian residents who receive foreign income and pay taxes on that income in a foreign country.
- The foreign country must have a Double Taxation Avoidance Agreement (DTAA) with India for the taxpayer to avail of relief under Section 90.
Types of Relief Available Under Section 90
- Exemption Method: The foreign income is exempt from tax in India, so only the foreign country’s tax is paid. This method is typically used when the DTAA allows an exemption.
- Tax Credit Method: This is the most common method, allowing taxpayers to claim a tax credit in India for the taxes paid abroad. The tax credit is limited to the amount of tax that would be payable on the income in India, ensuring relief but not exceeding Indian tax liability.
Example of Relief Under Section 90
Assume you earned â‚ą5 lakh as income in a foreign country, and you paid â‚ą50,000 in foreign taxes. If the same income is taxable in India at 30%, the tax due in India would be â‚ą1.5 lakh. You can claim a tax credit of â‚ą50,000 (the amount of foreign tax paid), thus reducing your Indian tax liability on that income to â‚ą1 lakh.
Filing Requirements for Claiming Relief Under Section 90
- Form 67: Taxpayers claiming relief on foreign income must file Form 67 online before filing their income tax return.
- Documentation: Supporting documents, like foreign income tax return and proof of foreign tax payment, must be maintained to support the claim for tax relief.
Summary of Sections 87A, 89, and 90
| Section | Eligibility | Purpose | Relief/Benefit |
|---|---|---|---|
| 87A | Resident individuals with income ≤ ₹5 lakh | Provides a tax rebate for low-income taxpayers | Maximum rebate of ₹12,500 |
| 89 | Individuals receiving arrears or advances | Offers relief on arrears/advance salary | Adjustment in tax based on past income years |
| 90 | Residents with foreign income | Prevents double taxation on foreign income | Tax credit or exemption on foreign taxes paid |
Practical Tips for Taxpayers
- Utilize Section 87A if Eligible: Ensure you claim the Section 87A rebate if your income is under â‚ą5 lakh to reduce tax liability effectively.
- File Form 10E for Salary Arrears: If you’re claiming relief under Section 89 for arrears or advance salary, file Form 10E online to avoid rejection of the relief claim.
- Keep Records for Section 90: If you have foreign income, maintain records of taxes paid abroad and file Form 67 before filing your return to claim tax credits seamlessly.
- Seek Professional Help for Complex Cases: Calculating relief under Sections 89 and 90 can be complex, especially when involving multiple years or foreign income. Consulting a tax professional can help ensure accurate calculations and maximize tax benefits.
Conclusion
Understanding Sections 87A, 89, and 90 can provide significant tax benefits for eligible taxpayers. Whether reducing tax liability for low-income earners, adjusting tax on salary arrears, or eliminating double taxation on foreign income, these provisions offer opportunities to optimize tax payments. By staying informed and filing the necessary forms, taxpayers can ensure compliance and make the most of these tax-saving provisions.
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