Tax refunds under section 87A hinge on income classification, not just total sums

Taxpayers receiving refunds after rebate claims under section 87A should understand that eligibility depends on how income is taxed and classified, not merely the gross total, with recent rules allowing refunds even when total income exceeds ₹12 lakh if certain conditions are met.

A taxpayer who received a refund after the Central Processing Centre applied a rebate under section 87A should not assume an error has been made. According to tax practitioners, the key point is that the rebate can still apply under the new regime even where total income crosses ₹12 lakh, provided the income taxed at normal slab rates stays within the eligible threshold and the balance is taxed at special rates. In the example at hand, salary and interest income fall within the slab-based computation, while short-term capital gains on shares are taxed separately, which can leave room for the rebate on part of the income and a corresponding refund if tax was already paid on the full amount.

That distinction matters because the rebate is linked to the nature of the income, not just the headline total. Under the updated rules for the new regime, tax relief under section 87A is available where total income taxed at normal rates does not exceed ₹12 lakh, with a rebate of up to ₹60,000. Income charged at special rates, such as certain capital gains, is not covered by that rebate. That is why a return can be processed with a refund even when the taxpayer’s overall receipts are above the threshold, so long as the slab-taxed portion remains eligible.

The same principle of looking beyond the gross figure applies to non-residents as well. In another case, an NRI living in the US received ₹88,000 in dividends from Indian companies and ₹20,000 in NRO interest. Although the total of ₹1.08 lakh is below the basic exemption limit, dividend income from an Indian company is taxed separately for non-residents at 20%, plus surcharge and cess, while NRO interest is normally taxed at regular rates. That means the final tax outcome depends on the character of each income stream, not just the aggregate amount.

For an NRI in that position, filing an Indian return is often sensible, particularly where tax has already been deducted at source from the NRO interest or dividend. The return can reconcile the tax already collected with the actual liability and may produce a refund if excess tax was withheld. The broader lesson in both cases is simple: in income tax, a number alone rarely tells the full story. Eligibility often turns on how the income is classified and which provision applies.