What is Income Tax Relief? Complete Guide to Sections 89, 87A & More

Income tax relief provisions under the Income Tax Act, 1961, offer taxpayers a way to mitigate specific tax burdens that might arise due to the nature or timing of certain income receipts or in situations involving potential double taxation. While distinct from general exemptions and deductions, these reliefs play a crucial role in ensuring fairness in the tax system.

Here’s an overview of some key types of income tax relief available in India:

1. Relief under Section 89(1) – For Income Received in Arrears or Advance

Section 89(1) provides relief when a taxpayer receives income in the current financial year that actually pertains to previous financial years. This commonly applies to:

Arrears of Salary: When an employee receives salary dues from past years in a lump sum.
Advance Salary: When salary for a future period is received in the current year.
Family Pension Arrears: Arrears of family pension received.
Gratuity, Commuted Pension, Compensation on Termination of Employment: In certain circumstances, relief may be available for lump sum payments received under these heads.

Why is this relief needed? Receiving income pertaining to past years in the current year can push the taxpayer into a higher tax bracket, resulting in a higher tax liability than if the income had been taxed in the respective past years. Section 89(1) aims to neutralize this additional tax burden.

How to claim Relief under Section 89(1): The relief is calculated based on a specific method outlined in Rule 21A of the Income Tax Rules. It essentially involves comparing the tax payable in the year of receipt (including the arrears/advance) with the tax that would have been payable had the arrears/advance been received in the years they pertained to. The difference in tax is granted as relief.

To claim this relief, it is mandatory to file Form 10E online on the Income Tax e-filing portal before filing your Income Tax Return for the year in which the arrears/advance are received. Failure to file Form 10E will result in the disallowance of the claimed relief during the processing of your ITR.

2. Rebate under Section 87A

Section 87A provides a tax rebate to resident individuals whose total income (after allowing for deductions under Chapter VI-A) does not exceed a specified limit. This rebate directly reduces the tax payable.

For Assessment Year 2025-26 (FY 2024-25):

Old Tax Regime: A resident individual with a total income up to ₹5 Lakhs is eligible for a rebate. The maximum rebate amount is ₹12,500 or the amount of tax payable, whichever is lower. This effectively makes the tax liability zero for resident individuals with income up to ₹5 Lakhs in the Old Regime.
New Tax Regime: A resident individual with a total income up to ₹7 Lakhs is eligible for a rebate. The rebate is the entire amount of income tax payable on that income. This effectively results in zero tax liability for resident individuals opting for the New Regime with income up to ₹7 Lakhs.

Rebate under Section 87A for FY 2025-26

🆕 New Tax Regime (Section 115BAC)

Eligibility: Resident individuals with taxable income up to ₹12,00,000.
Maximum Rebate: ₹60,000 or the total tax payable, whichever is lower.
Effective Tax Liability: Individuals with taxable income up to ₹12 lakh can effectively have zero tax liability after claiming the rebate.
Exclusions: Income taxed at special rates, such as short-term capital gains under Section 111A and long-term capital gains under Section 112, are excluded from the rebate calculation.

🧾 Old Tax Regime

Eligibility: Resident individuals with taxable income up to ₹5,00,000.
Maximum Rebate: ₹12,500 or the total tax payable, whichever is lower.
Effective Tax Liability: Individuals with taxable income up to ₹5 lakh can effectively have zero tax liability after claiming the rebate.

📌 Key Points to Remember

Resident Status: Only resident individuals are eligible for the Section 87A rebate.
Income Thresholds: Exceeding the specified income limits (₹12 lakh for the new regime and ₹5 lakh for the old regime) disqualifies you from claiming the rebate.
Special Rate Incomes: Incomes taxed at special rates (e.g., certain capital gains) are not considered when calculating eligibility for the rebate.
Standard Deduction: Under the new tax regime, salaried individuals can claim a standard deduction of ₹75,000. This means that if your gross income is up to ₹12.75 lakh, you can reduce your taxable income to ₹12 lakh and avail the full rebate.

✅ How to Claim the Rebate

Calculate Taxable Income: Deduct eligible deductions (like the standard deduction) from your gross income.
Determine Tax Liability: Compute the tax payable based on the applicable tax slabs.
Apply Rebate: If eligible, subtract the rebate amount (₹60,000 for the new regime or ₹12,500 for the old regime) from your tax liability.
File ITR: Ensure you file your Income Tax Return (ITR) to claim the rebate.

The rebate under Section 87A is applied to the income tax liability before adding the Health and Education Cess.

3. Marginal Relief

Marginal relief is a provision designed to protect taxpayers from a steep increase in tax liability when their income just crosses the threshold for applicability of surcharge. Surcharge is an additional tax on the income tax liability for individuals with higher incomes.

How Marginal Relief Works: When the total income slightly exceeds the surcharge threshold, the extra tax liability (including surcharge) on the income above the threshold can sometimes be more than the increase in income itself. Marginal relief limits the additional tax payable (due to surcharge) on the incremental income to the amount of that incremental income only. This ensures that the taxpayer is not disproportionately penalized for earning slightly above the threshold.

Marginal relief is automatically calculated by the income tax utility or software when you file your return if your income falls within the marginal relief band above the surcharge thresholds (e.g., above ₹50 Lakhs, ₹1 Crore, ₹2 Crore, ₹5 Crore, depending on the applicable surcharge rates for the relevant income slab and tax regime).

4. Relief from Double Taxation (Sections 90 and 91)

Double taxation occurs when the same income is taxed in two different countries – the country where the income is earned (source country) and the country where the taxpayer resides (country of residence). India provides relief from double taxation under Sections 90 and 91.

Section 90 (Relief under Double Taxation Avoidance Agreements – DTAA):
- India has entered into DTAAs with numerous countries to avoid double taxation. These agreements specify how income earned by a resident of one country in the other country will be taxed.
- Section 90 allows Indian residents to claim relief as per the provisions of the applicable DTAA. The relief can be provided through either the exemption method (where income is taxed in only one country) or the credit method (where tax paid in one country is allowed as a credit against the tax payable in the other country).
- To claim relief under Section 90, taxpayers must obtain a Tax Residency Certificate (TRC) from the tax authorities of the country where they are a resident and file Form 67 on the Income Tax e-filing portal before the due date for filing the Income Tax Return.
Section 91 (Unilateral Relief):
- This section provides relief to Indian residents who have earned income from a country with which India does not have a DTAA and have paid tax on that income in the foreign country.
- Relief is allowed as a deduction from the Indian income tax payable. The amount of relief is the lower of the Indian tax rate or the foreign tax rate applied to the doubly taxed income.
- To claim relief under Section 91, taxpayers need to furnish proof of tax paid in the foreign country and may also need to file Form 67.

Claiming Relief

Relief under these sections is generally claimed while filing the Income Tax Return. Specific forms like Form 10E (for Section 89(1)) and Form 67 (for Sections 90/91) are mandatory prerequisites for claiming the respective reliefs.

Conclusion

Income tax relief provisions are vital components of the Indian tax system that provide a safety net against undue tax burdens in specific situations. Understanding and correctly claiming applicable reliefs, such as those under Section 89(1), Section 87A, marginal relief, and double taxation relief, can significantly impact your final tax liability and ensure fair taxation of your income. Always ensure you meet the eligibility criteria and fulfill the procedural requirements, including filing the necessary forms, to successfully claim these reliefs.

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