Rebates and Reliefs

Chapter IX operates at a stage AFTER the computation of total income and AFTER the application of tax rates. While Chapter VIII deductions reduce ‘gross total income’ to arrive at ‘total income,’ Chapter IX reduces the TAX itself. The distinction is critical: a deduction reduces the base on which tax is computed; a rebate or relief reduces the tax already computed. This chapter contains six sections divided into two Parts: Part A (S.155-158) covers domestic rebates and reliefs, and Part B (S.159-160) covers double taxation relief for international income.

The practical significance: For the vast majority of individual taxpayers, S.156 is the single most impactful provision in the Act after the slab rates themselves. Under the new tax regime (S.202), a resident individual with total income up to Rs.12 lakh pays ZERO income tax because of the rebate under S.156(2). This effectively makes Rs.12 lakh the true exemption threshold under the new regime, despite the basic exemption limit being Rs.4 lakh. For businesses with cross-border operations, S.159 (DTAAs) is equally critical — it is the gateway to treaty benefits and the mechanism that prevents the same income from being taxed twice.

Key changes: (a) The rebate under the new regime has been dramatically enhanced from Rs.25,000 (for income up to Rs.7 lakh under the old S.87A) to Rs.60,000 (for income up to Rs.12 lakh under S.156(2)). This was introduced in Budget 2025. (b) A marginal relief provision (S.156(2)(b)) ensures that taxpayers with income slightly above Rs.12 lakh do not face a sudden spike in tax. (c) S.158 is a new provision addressing the taxation of retirement accounts maintained in foreign countries by returning NRIs. (d) The DTAA provision (S.159) now explicitly includes anti-treaty-shopping language.

S.155 is the enabling section that authorises the deduction of rebates specified in the chapter from income-tax computed on total income. It also provides that the rebate under S.156 cannot exceed the income-tax payable before the rebate. This prevents the rebate from creating a negative tax liability (i.e., the government never refunds more tax than is payable).

This is the most impactful provision for individual taxpayers. It operates differently under the old and new tax regimes:

9.4.1 Old Tax Regime — S.156(1)

9.4.2 New Tax Regime — S.156(2)

Marginal relief illustration: Consider a taxpayer under the new regime with total income of Rs.12,50,000. Without marginal relief, tax at new regime slab rates would be approximately Rs.67,500. With marginal relief under S.156(2)(b): the rebate = Rs.67,500 − (Rs.12,50,000 − Rs.12,00,000) = Rs.67,500 − Rs.50,000 = Rs.17,500. Effective tax = Rs.67,500 − Rs.17,500 = Rs.50,000. This ensures the taxpayer never pays more tax than the additional income earned above Rs.12 lakh. The marginal relief tapers off as income increases, until the breakeven point where the full slab tax equals the marginal tax.

When an assessee receives salary arrears, advance salary, salary for more than 12 months in one year, profits in lieu of salary (S.18(1)), or arrears of family pension (S.93(1)(d)), and the total income is assessed at a higher rate than it would have been if the income had been received in the year to which it related, the AO shall grant relief as prescribed. The relief is computed under Rule 21A of the 1962 Rules (now to be prescribed under the 2026 Rules): essentially, the tax difference between (a) tax on total income with arrears, and (b) tax on total income without arrears plus tax on arrears at average rate of the relevant year(s), is the relief.

Key restriction (S.157(2)): No relief is granted on income for which deduction has been claimed under S.19(1) (Table: Sl.No.12) — the standard deduction for entertainment allowance of government employees. This prevents double benefit on the same amount.

This is a targeted provision for returning NRIs. When a person who was non-resident in India opens a retirement benefit account in a foreign country (which taxes such income only on withdrawal, not on accrual — e.g., a 401(k) in the US), and subsequently becomes resident in India, the income accruing in that account would ordinarily be taxable in India on an accrual basis under Indian tax principles. S.158 provides relief: the income in such accounts shall be taxed in the manner and in the tax year as prescribed, effectively aligning the Indian taxation with the foreign country’s withdrawal-based taxation. This prevents the hardship of being taxed annually on notional accruals in a foreign retirement account that may not be accessible until retirement.

Three conditions: (a) The country must be notified by the Central Government. (b) The account must be for retirement benefits. (c) The account must be one where the notified country taxes income on withdrawal/redemption, not on accrual. The US has been notified for this purpose, recognising the large number of returning Indians with 401(k) and IRA accounts.

Section 159 is the constitutional gateway for all of India’s bilateral and multilateral tax treaties. It empowers the Central Government to enter into agreements with foreign governments or specified territories for: (a) granting relief from double taxation; (b) avoidance of double taxation without creating opportunities for non-taxation or reduced taxation through evasion or avoidance (including treaty-shopping); (c) exchange of information; and (d) recovery of tax. India currently has DTAAs with over 90 countries.

Anti-treaty-shopping (S.159(3)(b)): The 2025 Act now explicitly provides that DTAAs should avoid double taxation ‘without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory).’ This codifies the anti-abuse principle that was previously implicit and is consistent with India’s Multilateral Instrument (MLI) commitments.

Tax Residency Certificate (S.159(8)): A non-resident claiming treaty benefits MUST obtain a certificate of being a resident in that country from the government of that country, AND provide such other documents/information as prescribed. The TRC is a necessary (but not sufficient) condition for treaty relief. It does not automatically entitle the assessee to treaty benefits if other substance requirements are not met.

Interpretation of treaty terms (S.159(7)): Three-tier hierarchy: (a) if defined in the treaty — treaty definition prevails; (b) if not defined in the treaty but defined in the Act — the Act’s definition plus any Central Government explanation; (c) if not defined in either — meaning in any Central Act related to taxes, or otherwise in any other Central law. This hierarchy provides certainty in treaty interpretation.

Where an Indian resident earns income in a country with which India has NO DTAA, and pays income-tax in that country, S.160 provides unilateral relief. The relief is the lower of: (a) the Indian rate of tax on the doubly-taxed income, or (b) the foreign rate of tax on that income. If both rates are equal, the Indian rate applies. This ensures that the total tax burden on doubly-taxed income does not exceed the higher of the two rates.

Key definitions: (a) ‘Income-tax’ in relation to a foreign country includes excess profits tax and business profits tax (S.160(3)(a)). (b) ‘Indian rate of tax’ = total Indian tax (after domestic reliefs, before S.160 relief) / total income (S.160(3)(c)). (c) ‘Rate of tax of the said country’ = foreign tax actually paid (after all foreign reliefs, before foreign double taxation relief) / total income as assessed in that country (S.160(3)(d)).

S.160 vs S.159: Unilateral relief is always less generous than treaty relief. Under a DTAA (S.159), the treaty may provide full exemption of the foreign income in India (exemption method) or a full credit for foreign tax (credit method). Under S.160, the credit is always limited to the lower of the two rates, and only the ‘deduction method’ applies — never exemption. Assessees with foreign income should always check whether a DTAA exists before relying on S.160.

[End of Chapter IX (Rebates and Reliefs). Chapter X: Special Provisions Relating to Avoidance of Tax (Transfer Pricing and GAAR) follows.]